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PRINCIPLES 

OF 

THE  NEW  ECONOMICS 


CROWELL'S 
SOCIAL   SCIENCE    SERIES 

EDITED  BY 

SEBA  ELDRIDGE 

Department  of  Sociology,  University  of  Kansas 

Principles  of  tlie  New  Economics 

By  Lionel  D.  Edie,  Colgate  University 

An  Introduction  to  tlie  Study  of  Labor  Problems 

By  Gordon  S.  Watkins,  University  of  Illinois 

IN  PREPARATION 

History  of  Socialism 

By  Harry  W.  Laidler 

International  Government 

By  Jessie  Wallace  Hughan 

The  Nature  of  Culture 

By  Clark  Wissler 

Principles  of  Public  Finance 

By  Jens  Jensen 

THOMAS  Y.  CROWELL  COMPANY 


PRINCIPLES 

OF   THE 

NEW   ECONOMICS 


BY 
LIONEL  D.  EDIE 

ASSOCIATE    PROFESSOB    OF    HISTORY    AND    POLITICS 

DIVISION   OF  CURRENT  INDUSTRIAL  PROBLEMS 

COLGATE     UNIVERSITY 


CROWELL'8    SOCIAL    SCIENCE    SERIES 

EDITED   BY 

SEBA  ELDRIDGE 
University  of  Kansas 


NEW   YORK 
THOMAS  Y.  CROWELL  COMPANY 

PUBLISHERS 


^TVVl 


Copyright,  1922, 
By  THOMAS  Y.  CROWELL  COMPANY 


Third  Printing 


Printed  in  the  United  States  of  America 


H3 


DEDICATED    TO    MY    WIPE 

MARIE   BRUCE    EDIE 


EDITOR'S   NOTE 

There  is  an  increasing  recognition  of  the  necessity  of 
approaching  economic  topics  and  problems  from  the  psycho- 
logical and  historical  viewpoints,  as  well  as  from  the  stand- 
point of  the  classical  economists;  and  also  of  taking  into 
account  the  far-reaching  effects  on  economic  processes  pro- 
duced by  the  industrial  applications  of  modern  science. 
Indeed,  it  is  safe  to  say  that  our  economic  system  can 
scarcely  be  comprehended  unless  it  is  viewed  as  an  organi- 
zation, on  a  grand  scale,  of  historical,  mental  and  physical 
factors  as  these  are  prepared  or  revealed  by  scientific  in- 
quiry. Professor  Edie's  book  offers  an  admirable  intro- 
duction to  economics  considered  as  a  realistic  description  of 
the  economic  system  produced  by  these  groups  of  factors. 

S.  E. 


i  PREFACE 

The  primary  purpose  of  this  volume  is  to  integrate  the 
Sif  varied  developments  of  recent  years  in  economic  thinking, 
and  to  relate  them  to  the  body  of  economic  ideas  which  have 
jjQ  been  evolved  through  a  long  history  of  economic  reflection. 
J  A  number  of  departures  from  the  orthodox  economic  doc- 
\\,  trines  prevalent  at  the  close  of  the  last  century  have  led  to 
•»  the  development  of  several  important  schools  of  new  eco- 
nomic thought.     Each  separate  school  has  departed  from 
I*  the  worn  and  beaten  paths  of  economic  theory  in  ways  dis- 
>  tinct  and  peculiar  to  itself,  and  each  represents  an  inde- 
fJ  pendent  and  original  direction  of  economic  interpretation. 
-I  In  the  early  stages  of  such  a  movement  in  economic  think- 
ing, it  is  natural  for  both  the  adherents  and  critics  of  each 
J  branch  of  the  movement  to  interest  themselves  in  the  unique 
J  and  unusual  features  of  the  new  doctrines  of  each  inde- 
•i^  pendent  branch.     The  stage  has  been  reached,  however, 
rjlwhen  it  is  of  deep  importance  that  the  several  divergent 
CA  tendencies  in  economic  interpretation  should  be  integrated 
in  their  fundamental  relations,     The  attempt  at  such  an 
integration  takes  full  cognizance  of  the  many  contradic- 
tions and  inconsistencies  between  the  various  branches  of 
thought,  but  it  also  acknowledges  fully  the  many  basic  ways 
in  which  the  various  branches  are  supplementary  and  co- 
ordinate.   The  guiding  principle  of  this  volume  is  that  the 
true  value  of  all  the  independent  developments  in  recent 
economic  thought  is  realized  not  merely  from  a  view  of 
each  branch  of  thought  by  itself,  but  more  completely  from 
a  view  of  the  composite  evolution  in  economic  thinking. 
The  recent  pluralistic  progress  in  economic  thinking  has  a 
fundamental  unity. 

vii 


viii  Preface 

Some  of  the  outstanding  branches  of  economic  thinking 
may  be  mentioned  for  the  sake  of  illustrating  the  scope  of 
this  undertaking.  There  ha^  appeared  within  the  last  few? 
years  a  powerful  psychological  school  of  economic  thinkers, 
whose  distinctive  characteristic  is  not  that  they  have  intro- 
duced psychology  into  economic  theory,  for  earlier  schools 
of  value  theorists  made  that  introduction  some  time  ago; 
but  that  they  have  introduced  a  new  type  of  psychol- 
ogy into  economic  thinking, — the  scientific  psychology 
which  has  made  its  monumental  discoveries  and  progress 
during  the  last  two  decades  or  so.  This  scientific  psychol- 
ogy has,  as  John  Dewey  observes,  displaced  the  exploded 
psychology  of  the  nineteenth  century,  and  has  brought  out 
the  advances  embodied  in  modern  social  psychology,  com- 
parative psychology,  behavioristic  psychology,  normal  and 
abnormal  psychology,  and  numerous  other  special  fields  of 
modern  psychological  research  and  discovery.  The  psycho- 
logical developments  in  economic  thinking  are  at  bottom 
in  thorough  harmony  with  what  has  been  called  "institu- 
tional economics. ' '  Moreover,  these  schools  of  modern  eco- 
nomic thought  integrate  in  fundamental  ways  with  descrip- 
tive economics,  with  functional  economics,  with  social 
economics,  with  price  economics,  with  dynamic  economics, 
or  with  welfare  economics.  The  paramount  and  striking 
feature  of  these  several  branches  of  economic  thought  is  the 
fact  that  in  their  general  bearing  and  broad  scope  they 
represent  a  great  forward  movement  in  the  interpretation 
of  the  economic  phases  of  life. 

It  should  not  be  assumed  that  a  recognition  of  recent 
advances  in  economic  theory  implies  a  repudiation  of  old 
economic  theory.  The  old  economic  theory,  it  is  true,  is 
charged  with  many  fallacies,  but  at  heart  its  principles 
were  enduring.  Probably  the  chief  cause  of  uneasiness  in 
fields  of  economic  thought  has  been  the  feeling  that  former 
economic  theory  was  inadequate.  Many  of  its  doctrines  are 
essential,  but  are  too  limited  to  account  fully  for  economic 


Preface  ix 

life.  Hence,  the  present  integration  of  recent  tendencies  in 
economic  thinking  has  an  ungtudging  tolerance  for  a  large 
part  of  previous  economic  thinking.  The  spirit  of  this 
study  is  not  to  cut  loose  from  the  orthodox  theory  of  the 
recent  past,  but  to  associate  the  new  with  the  old  in  their 
rightful  relationships. 

This  process  of  integrating  the  new  and  relating  it  to  the 
old  necessarily  involves  much  comparison  and  contrast  of 
economic  doctrines.  The  literature  of  the  field  presents  an 
endless  amount  of  controversy  and  dispute.  However,  the 
method  of  the  present  volume  is  not  to  controvert,  to  dis- 
pute or  to  argue,  but  rather  to  make  as  direct  and  clear  a 
statement  as  possible  of  the  integrated  and  related  bodies  of 
interpretation.  No  attempt  is  made  to  explain  the  ways 
and  processes  by  which  the  present  organization  of  thought 
has  been  arrived  at,  for  the  simple  reason  that  such  an 
explanation  would  involve  a  volume  of  controversy.  Nor  is 
the  discussion  contained  in  these  chapters  framed  for  the 
purpose  of  convincing  professional  economists  of  the  de- 
fensibility  of  the  author's  views.  The  positive  endeavor  is 
to  state  the  body  of  thought  in  a  form  which  can  be  readily 
understood  by  a  university  student  or  by  a  general  reader 
of  good  intelligence.  It  is  hoped  that  such  a  statement  of 
the  body  of  thought  will  be  convincing  to  economists,  and 
the  writer  prefers  to  let  the  plain  statement  of  the  case  do 
what  convincing  it  will,  rather  than  to  confuse  the  state- 
ment by  entering  constant  anticipations  of  objections  and 
criticisms.    The  method  is  expository  and  non-controversial. 

In  the  course  of  the  work  of  constructing  the  book,  deeply 
appreciated  help  has  been  received,  either  in  the  form  of 
critical  suggestions  about  the  organization  of  the  thought 
or  of  sympathetic  reading  of  parts  of  the  manuscript,  from 
Dr.  Leon  C.  Marshall,  Dean  of  the  School  of  Commerce  and 
Administration,  of  the  University  of  Chicago ;  Dr.  Elmer 
Burritt  Bryan,  President  of  Ohio  University;  Mr.  Ordway 
Tead,  Bureau  of  Industrial  Research  of  New  York  City; 


X  Preface 

Dr.  H,  G.  Good,  Associate  Professor  of  Psychology  and 
Education,  of  Colgate  University;  Professor  J.  M.  Short- 
liffe,  head  of  the  Department  of  Economics,  of  Colgate 
University;  Professor  E.  W.  Smith,  head  of  the  Depart- 
ment of  Rhetoric ;  Dr.  F.  H.  Allen,  head  of  the  Department 
of  History  and  Politics;  Associate  Professor  C.  E.  Gates, 
Associate  Professor  C.  A,  Kallgren,  and  Mr.  R.  M.  Gidney, 
Controller  at  Large,  Federal  Reserve  Bank  of  New  York. 
The  author  is,  of  course,  solely  responsible  for  the  contents 
of  the  volume. 

Cordial  appreciation  is  also  due  many  friends  and  stu- 
dents who  have  aided  in  many  ways  in  carrying  on  the  work. 

I  am  especially  glad  to  enter  here  a  full  recognition  of  the 
partnership  of  my  wife  in  all  phases  of  the  undertaking. 
Her  thoughtful  and  patient  collaboration  is  embodied  in 
each  page  of  the  volume. 

Lionel  Danforth  Edie. 

March  21  ,1922. 


\^} 

y- 


CONTENTS 

PAUT  I— ECONOMIC  PSYCHOLOGY 

CHAPTER  PAGE 

I.    The  Significance  of  Psychology  in  Economics  ,     .         1 

II.     Economic  Expression  of  Instincts 8 

The  Instinct  of  Workmanship — The  Instinct  of  Posses- 
sion— Disposition  to  Self-Assertion — Instinct  of  Sub- 
missiveness — The  Parental  Instinct — Sex  Instinct — The 
Gregarious  Tendency — Instinct  of  Flight  and  Fear — 
Pugnacity  and  Rivalry — Some  Instincts  of  Minor  Sig- 
nificance —  Hunting  —  The  Housing  Instinct  —  The  In- 
stinct of  Migration — The  Instinct  of  Play — Disposition 
to  Mental  Activity. 

III.  The  Organization  of  Human  Nature 39 

Habit — Imitation,    Sympathy,    Suggestion — Inequalities 

of  Human  Equipment. 

IV.  Human  Adaptation  to  Economic  Environment    .      .       52 
Discipline  —  Elimination  —  Sublimation  —  Rational- 
ization— Revolt. 

PART  II— ECONOMIC  INSTITUTIONS 

AND  FUNCTIONS 

V.    The  Mechanical  and  Scientific  Basis  of  Economics       72 
Machinery  —  Transportation  —  Chemistry  —  Geology 
— Electricity — The  Science  of  Economic  Organization — 
Psychology  of  Industrial  Engineering. 

VI.     Labor:  Its  Part  in  Production 99 

The  Job — Hours  of  Work — Wages — Standard  of  Living 
— Incentives — Bargaining  Power — Custom  and  Habit — 
Wages  and  Labor  Efficiency — Power — Environment — 
The  Mind  of  the  Worker — Immigration — Population 
— Economic  Significance  of  the  National  Character. 


xii  Contents 

CHAFTEX  PAOB 

VII.  Capital:  The  Rights  and  Duties  of  Owneeship  .  .  175 
Statistics  of  Wealth  and  Income — Interpretation  of  the 
Facts — Property  a  Group  of  Rights — Ownership  as  a 
Corporate  Phenomenon — The  Principles  of  Minimum 
and  Surplus — Inequalities  Due  to  Unequal  Privileges — 
Monopoly  Privileges  a  Cause  of  Inequalities — Unfore- 
seen Chance  as  a  Cause  of  Inequalities. 

VIII.  Management:  Its  Technique  and  Responsibilities  .  236 
Classification  of  Types  of  Management — The  Mechanism 
of  Corporation  Management — Technique  of  Executive 
Direction — Business  Combination  and  Concentration  of 
Management — Reasons  for  the  Combination  Movement 
— Successes  and  Failures  in  Combination. 

IX.  Mabkets:  Their  Principles  and  Strategy  .  .  .  279 
The  Cost  of  Production  Theory  of  Prices — Supply  and 
Demand — The  Analysis  and  Creation  of  Demand — Ad- 
vertising— Sales  Management — Guidance  of  the  Ratio 
Between  Supply  and  Demand — Variations  from  the 
General  Principles  of  the  Market — Market  Mechanism 
Geographically  Considered — Market  Mechanism  Func- 
tionally Considered  —  Price  Movements  in  Various 
Stages  of  the  Market  Process — Price  Policies — Below 
the  Market  Level — Above  the  Market  Level — Business 
Combinations  and  Price  Policies — Monopoly  Price  and 
What  the  Traffic  Will  Bear — Monopolies  and  the  Steady- 
ing of  Prices — Price  Discrimination — The  Science  of 
Spending  Money — ^Technology  for  Guidance  of  Con- 
Bumption. 

X.  Money  and  Credit:  Their  Services  and  Dangers  .  .  366 
Forms  of  Money —  Banking  and  Commercial  Credit 
— Forms  of  Loans — Discounts — The  Network  of  Finan- 
cial Institutions — Savings  Banks — Trust  Companies — 
Foreign  Investment  Banking — Other  Financial  Organi- 
zations— Federal  Reserve  System — Centralization — Note 
Issue  —  Deposit  Currency  —  Reserves  —  Clearance  and 
Other  Functions — International  Banking  and  Credit 
— ^The  Principles  of  Foreign  Exchange — The  Dangers  of 
the  Credit  System — Business  Cycles — Psychological 
Foundations  of  the  Credit  System. 


Contents  xiii 

PART  in— ECONOMIC  ADAPTATION 

CBAPTEK  PAGE 

XI.     Public  Control 453 

General  Regulation  of  Business — Governmental  Control 
of  Labor — Reform — Public  Opinion  and  Public  Control. 

XII.     Economic  Radicalism 487 

General  Characteristics  of  Radicalism — Particular 
Types  of  Radicalism — Economic  Analysis  of  Socialistic 
Proposals. 

XIII.     Economic   Democracy 499 

Fundamental  Conceptions — Democracy  a  Process  of 
Growth — Works  Councils — Labor  Unions. 

INDEX 521 


PART  I 
ECONOMIC   PSYCHOLOGY 


CHAPTER  I 

THE  SIGNIFICANCE  OF  PSYCHOLOGY  IN  ECONOMICS 

Economics  is  the  science  of  human  nature  in  its  relations 
to  the  ordinary  business  of  life.  It  involves  a  threefold 
analysis, — first,  of  the  motives  and  satisfactions  of  men  in 
their  dealings  with  wealth ;  second,  of  the  processes  and 
organization  by  which  wealth  is  controlled;  third,  of  the 
forces  and  directions  of  improvement  and  change.  Thus 
economics  has  a  human  factor,  an  organization  factor,  and 
a  progress  factor.  Economics  is  the  science  of  all  three 
as  a  unit  and  to  study  any  one  exclusively  is  to  secure  only 
a  partial  analysis  of  the  science.^ 

'*"'  The  human  side  of  economics  is  approached  chiefly  by 
psychology.  Men  are  the  vital  part  of  the  economic  order. 
It  is  men  who  invent  machinery  and  make  scientific  dis- 
coveries. It  is  men  who  operate  machines  and  guide  the 
process.  It  is  men  who  compete  for  the  ownership  of 
property  and  who  manage  the  economic  system  from  top 
to  bottom.  It  is  men  who  bring  about  progress  in  the 
countless  parts  of  the  system.  It  is  to  satisfy  the  needs 
and  wants  of  men  that  all  economic  activity  is  carried  on. 
The  human  factor  of  economics  is  fundamental,  and  the 
science  of  this  human  factor  is  economic  psychology. 

Psychology  approaches  the  problem  by  a  study  of  the 
primary  motives  of  conduct.    Psychology  attempts  answers 

1  See  Alfred  Marshall,  "Principles  of  Economics,"  p.  1.  Seventh 
edition. 


2     The  Significance  of  Psycliology  in  Economics 

to  the  questions, — Why  do  men  behave  in  the  business 
world  as  they  do?  Do  these  forms  of  behavior  make  for 
the  proper  amount  of  satisfaction  and  welfare?  What 
other  forms  of  behavior  are  possible  and  practicable? 
What  are  the  chief  motives  which  urge  men  forward  in 
their  whole  dealing  with  these  questions  of  wealth? 

Men  are  bundles  of  tendencies  to  act.  Whether  in  the 
banker's  office,  or  around  the  table  of  the  board  of  directors, 
or  on  the  salesman's  route,  or  at  the  worker's  machine,  men 
are  aggregates  of  urges  to  act  in  certain  directions.  In 
technical  psychological  terms,  these  tendencies  are  instinc- 
tive tendencies.  For  purposes  of  economic  thinking  they 
are  as  well  termed  dispositions,  or  urges,  or  motives,  or 
drives.^  A  comprehensive  definition  of  them  is  given  by 
McDougall  as  follows.-  "The  human  mind  has  certain  in- 
nate or  inherited  tendencies  which  are  the  essential  springs 
or  motive  powers  of  all  thought  and  action,  whether  indi- 
vidual or  collective,  and  are  the  bases  from  which  the 
character  and  will  of  individuals  and  of  nations  are  grad- 
ually developed  under  the  guidance  of  the  intellectual 
faculties.  .  .  .  Directly  or  indirectly  the  instincts  are  the 
prime  movers  of  all  human  activity;  by  the  conative  or 
impulsive  force  of  some  instinct  (or  of  some  habit  derived 
from  an  instinct),  every  train  of  thought  however  cold  and 
passionless  it  may  seem,  is  borne  along  toward  its  end,  and 
every  bodily  action  is  initiated  and  sustained.  The  instinc- 
tive impulses  determine  the  ends  of  all  activities  and  sup- 
ply the  driving  power  by  which  all  mental  activities  are 
sustained.  .  .  .  Take  away  these  instinctive  dispositions 
with  their  powerful  impulses,  and  the  organism  would 
become  incapable  of  activity  of  any  kind;  it  would  lie 
inert  and  motionless  like  a  wonderful  clockwork  whose 
mainspring  had  been  removed  or  a  steam  engine  whose 

1  For  discussion  of  definitions  of  instinct,  see  McDougall,  "Social  . 
Psychology,"  pp.  23-29 ;  O.  Tead,  "Instincts  in  Industn-."  p.  5 ;  T.  * 
Veblen.  "Instinct  of  Workmanship,"  Chapter  T;  G.  Wallas,  "The 
Great  Society."  Chapter  I;  ]M.  Parmelee,  "Science  of  Human  Be- 
havior," Chapters  XI,  XII,  XIII;  E.  Thorndike,  "Original  Nature 
of  IMan,"  pp.  1-5;  J.  B.  Watson,  "Psychology  from  the  Standpoint  of 
a  Behaviorist,"  pp.  231-240,  261;  H.  C.  Link,  "Instinct  and  Value, 
American  Journal  of  Psychology,  Jan.,  1922,  pp.  1-17. 


The  Significance  of  Psychology  in  Economics     3 

fires  had  been  withdrawn.  These  impulses  are  the  mental 
forces  that  maintain  and  shape  all  the  life  of  individuals 
and  societies."^ 

These  impulsive  forces  cannot  be  classified  in  any  hard 
and  fast,  absolute  divisions.  Indeed,  such  a  cut  and  dried 
classification  is  unnecessary;  as  will  appear  from  the  fol- 
lowing list  of  some  of  the  paramount  tendencies.  There 
is  an  urge  to  self-assertion  toward  leadership,  mastery, 
power,  which  makes  men  move  heaven  and  earth  to  sit 
on  a  coveted  board  of  directors  and  map  out  the  policies 
of  corporations.  There  is  an  instinct  of  possession  or 
acquisition  which  drives  men  to  the  collection  of  great 
blocks  of  real  estate  or  of  multimillionaire  fortunes.  There 
is  an  instinct  of  workmanship  or  constructiveness,  which 
determines  whether  production  shall  be  50  per  cent,  or 
100  per  cent,  of  its  possibilities,  and  which  virtually 
compels  men  of  great  genius  to  build  up  the  large  business 
organizations  of  the  modern  day  for  the  sheer  joy  of 
achievement.  There  is  a  parental  instinct  which  underlies 
kindliness,  sympathy,  sacrifice  and  service,  wherever  it 
appears  in  the  economic  world,  whether  strictly  within 
one's  own  immediate  family  or  through  the  community  at 
large.  There  is  a  sex  instinct  which  is  utilized  effectively 
in  a  large  part  of  advertising  display,  and  which  makes 
the  proper  entertainment  of  workers  while  off  the  job  a 
highly  important  business  problem.  There  is  a  herd  in- 
stinct under  whose  force  a  rumor  of  pessimism  may  aid  in 
dragging  the  financial  community  to  a  temporary  or  pro- 
longed state  of  depression,  which  may  influence  in  vital 
ways  the  formation  of  labor  unions,  or  which  may  deter- 
mine degrees  of  congestion  of  population  in  large  indus- 
trial centers.  There  is  an  instinct  of  submission  which 
may  lead  a  corporation  manager  to  prefer  the  status  of  a 
subsidiary  in  a  large  amalgamation  to  the  status  of  an  in- 
dependent cut-throat  competitor,  or  which  may  determine 
the  attitude  of  workers  toward  movements  for  industrial 
democracy.  There  is  an  instinct  of  pugnacity  which  flashes 
out  from  time  to  time  in  strikes  or  in  the  bitter  struggles 
1  "Introduction  to  Social  Psychology,"  p.  45. 


4     The  Significance  of  Psychology  in  Economics 

of  commercial  competition.  There  is  an  instinct  of  curi- 
osity or  thought  which  inspires  the  inventiveness  of  men, 
concentrates  their  mental  powers  on  the  possibilities  of 
an  ever  better  science  of  organization,  and  encourages 
countless  endeavors  at  increased  efficiency.  There  is  a  dis- 
position to  fear  which  worries  the  business  man  with  the 
dread  of  bankruptcy  and  strikes  into  the  heart  of  the 
laborer  the  terrors  of  unemployment. 

It  is  not  meant  to  give  the  impression  that  this  sort  of 
classification  is  all  in  all.  The  significance  of  the  list  is 
that  it  brings  within  small  compass  some  of  the  para- 
mount dispositions  of  men  in  so  far  as  those  dispositions 
affect  their  economic  conduct.  From  other  standpoints, 
other  groupings  might  be  of  greater  practical  value,  but 
from  the  economic  standpoint,  the  most  useful  procedure 
is  to  draw  from  psychology  those  parts  which  have  most 
value  for  the  study  of  economics.  In  the  economic  world, 
therefore,  it  is  indispensable  to  recognize  that  men  move 
and  work  and  plan  and  achieve  in  response  to  certain 
primary  springs  of  action, — such  as  the  desire  for  power, 
or  ownership,  or  achievement,  or  parental  satisfaction,  or 
sex  contentment,  or  herd  unity,  or  submission,  or  pug- 
nacity, or  thought. 

With  this  brief  picture  of  some  of  the  predominant  ten- 
dencies in  mind,  some  important  characteristics  of  their 
activity  can  be  pointed  out  Avith  greater  definiteness.  First 
of  all  they  are  born  into  the  human  being.  Through 
hundreds  of  generations  they  have  been  built  into  the  life 
blood  of  the  human  race.  They  are  hereditary  tenden- 
cies in  human  nature,  passed  on  from  generation  to  gen- 
eration, primitive,  ineradicable,  inescapable,  the  stuff  of 
which  human  nature  is  made.  They  are  all  part  and 
parcel  of  man's  inheritance,  his  racial  birthright,  and  in 
their  applications  to  his  modern  economic  life,  this  origin, 
with  all  that  it  implies  of  vitality  and  power,  needs  to  be 
held  vividly  in  mind. 

A  second  important  characteristic  of  these  tendencies 
is  their  dynamic  quality.  They  push  and  urge  and  drive 
men  from  within.     There  is  something  compelling  about 


The  Significance  of  Psychology  in  Economics     5 

them.  They  do  not  make  for  quiet,  but  for  change.  They 
are  the  restless  qualities,  the  forces  behind  initiative.  They 
are  motives  to  behavior,  sources  of  animation,  filled  with 
purpose  and  desire  and  aspiration.  From  the  town  loafer 
to  the  captain  of  industry,  they  are  drives  toward  be- 
havior. Under  their  urge,  growth,  life,  change  is  the  key- 
note of  the  economic  world.  They  are  the  incentives 
behind  the  hundreds  of  thousands  of  inventions  of  industry, 
behind  the  explorations  which  have  opened  the  world  to 
commerce,  behind  the  gigantic  business  combinations  and 
the  myriads  of  lesser  enterprises, — behind  the  whole  eco- 
nomic organization. 

A  third  important  feature  is  their  pliability.  At  birth, 
they  are  general  tendencies,  indefinite  urges,  broad  forces. 
By  development  and  experience  the  tendency  to  self-asser- 
tion may  lead  to  the  struggle  for  power  as  a  labor  leader 
or  as  a  corporation  president.  Environment,  family,  school, 
reading  all  serve  from  early  life  to  mold  and  shape  and 
fashion  a  particular  tendency  in  certain  ways.  Every  out- 
side influence  counts  in  the  application  of  the  basic  ten- 
dencies to  the  channels  of  life.  A  man  born  with  a  dom- 
inant love  of  power  will  weld  all  these  outside  influences 
into  the  real  metal  of  his  nature,  and  whether  in  states- 
manship or  finance  or  education  or  labor,  will  be  a  leader 
under  the  domination  of  the  original  tendency  to  power. 
So  with  all  the  instincts.  At  birth  they  are  "unlearned 
tendencies."  Childhood  and  the  experiences  of  adult  years 
color  and  shape  them,  but  they  are  still  true  to  their 
essence. 

A  fourth  important  feature  is  their  interplay.  One 
separate  tendency  does  not  commonly  hold  exclusive  sway. 
Parental  love,  possessiveness,  self-assertiveness  may,  for 
example,  combine  in  any  proportion  among  themselves,  or 
with  any  of  the  other  tendencies  to  produce  behavior. 
But  in  most  of  the  affairs  of  industry,  some  one  tendency 
or  small  group  of  tendencies  is  paramount  in  the  policies 
of  the  individual,  the  class,  or  the  nation.  Different  in- 
stincts may  leap  into  the  ascendency  at  different  times. 
Pugnacity  may  master  the  man  to-day  and  fear  to-morrow. 


6     The  Significance  of  Psychology  in  Economics 

There  is  interaction,  combination,  succession,  waxing  and 
waning,  fitting  the  demands  of  the  hour,  rising  to  the 
occasion. 

Finally,  the  instinctive  dispositions  involve  the  phases 
described  by  McDougall  as  follows:  "Every  instance  of 
instinctive  behavior  involves  a  knowing  of  some  thing  or 
object,  a  feeling  in  regard  to  it,  and  a  striving  towards 
or  away  from  that  object.  .  .  .  We  may  then  define  an 
instinct  as  an  inherited  or  innate  psycho-physical  disposi- 
tion which  determines  its  possessor  to  perceive,  and  to  pay 
attention  to  objects  of  a  certain  class,  to  experience  an 
emotional  excitement  of  a  particular  quality  upon  per- 
ceiving such  an  object,  and  to  act  in  regard  to  it  in  a  par- 
ticular manner,  or,  at  least,  to  experience  an  impulse  to 
such  action."^  For  the  biologist  or  physiologist  or  pure 
psychologist,  it  is  often  desirable  to  analyze  and  dissect 
the  instinctive  tendencies  and  concentrate  attention  upon 
their  unit  elements.  But  for  purposes  of  economic  psychol- 
ogy it  is  commonly  more  serviceable  to  think  in  terms  of 
the  whole  disposition.  We  perceive  danger,  experience 
the  emotion  of  fear  and  the  impulse  to  escape.  They  are 
separate  phases  of  a  whole  process,  a  total  instinctive 
tendency.  The  usefulness  of  this  conception  is  apparent 
from  a  more  detailed  definition  of  emotion.  Angell  ex- 
plains that  "All  the  more  profound  types  of  human  emo- 
tions are  based  upon  the  life  of  instinct."  Sherrington 
remarks  of  emotion,  "If  developed  in  intensity,  it  impels 
toward  vigorous  movement,"  and  Cannon  writes,  "That 
the  major  emotions  have  an  energizing  effect  has  been  com- 
monly recognized."  The  important  conception  therefore 
is  the  whole  process,  perceptual,  emotional  and  energizing 
or  impulsive,  because  the  whole  process  is  the  determining 
factor  in  social  and  economic  behavior. 

Considered  in  these  ways,  economic  psychology  is  not  one 
of  the  exact  sciences.  It  is  true,  of  course,  that  certain 
phases  of  psychological  study  can  be  reduced  to  exact 
measurement,  such,  for  example,  as  intelligence  tests,  ad- 
vertising tests,  fatigue  studies,  etc.  However,  in  its  gen- 
1  Social  Psychology,  pp.  27,  30. 


The  Significance  of  Psychology  in  Economics    7 

eral  aspects,  it  has  to  proceed  without  the  units  of  measure- 
ment which  prevail  in  physics  or  electricity  or  chemistry. 
There  are  no  calories  or  meters  or  volts  or  grams  in  human 
dispositions.  The  dispositions  are  incapable  of  measure- 
ment by  any  form  of  yard  stick  or  weighing  scale.  Motives 
and  tendencies  are  always  matters  of  more  or  less.  The 
combinations  of  instincts  allow  for  infinite  variation. 
Mathematical  exactitude  is  not  the  exclusive  mental  power 
in  psychological  thinking;  an  important  power  is  judg- 
ment. Economic  psychology  is  not  for  this  reason  any  less 
a  science.  The  test  of  a  human  science  is  not  whether  it 
is  amenable  to  statistical  computation ;  the  test  is  whether  it 
marshals  knowledge  and  experience  to  effective  and  ser- 
viceable ends.  Economic  psychology  endeavors  to  come 
up  to  that  fundamental  test.  In  this  respect  psychology 
works  with  essentially  the  same  technique  as  is  employed 
in  most  of  the  phases  of  economic  thinking  and  of  social 
science  thinking  generally. 


CHAPTER    II 
ECONOMIC   EXPRESSION  OF  INSTINCTS 

The  Instinct  of  Workmanship 

Men  have  an  innate  desire  for  constructive  effort.  They 
are  disposed  toward  making  something,  building  some- 
thing, fashioning  something.  Veblen  has  said,  "Chief 
among  those  dispositions  that  conduce  directly  to  the  mate- 
rial well-being  of  the  race  and  therefore  to  its  biological 
success,  is  perhaps  the  instinctive  bias  here  spoken  of  as 
the  instinct  of  workmanship."  And  James  in  a  forceful 
chapter  on  the  psychology  of  instincts  declares,  "Construe- 
tiveness  is  as  genuine  and  irresistible  an  instinct  in  man 
as  in  the  bee  or  the  beaver. ' '  In  explaining  the  paramount 
motive  in  his  gigantic  industrial  achievements,  Charles 
Schwab  states,  "Why  do  I  work?  What  do  I  work  for? 
...  I  work  just  for  the  pleasure  I  find  in  work,  the  satis- 
faction there  is  in  developing  things,  in  creating." 

It  is  not  implied  that  this  constructive  motive  is  isolated 
from  other  motives  in  the  lives  of  successful  business  men. 
The  fundamental  impression  should  be  that  with  a  sub- 
stantial group  of  business  leaders,  an  enjoyment  of  con- 
structive achievement  is  a  dominating  motive.  Such  men 
are  not  animated  solely  or  even  primarily  by  the  lure  of 
a  fortune,  but  by  the  lure  of  great  creative  achievement. 
This  impulse  is  particularly  outstanding  in  the  engineer- 
ing feats  of  recent  years,  such  as  the  erection  of  large 
bridges,  the  digging  of  tunnels,  the  building  of  sky- 
scrapers. Where  this  creative  incentive  is  uppermost  the 
achievements  resulting  usually  have  a  high  social  value. 
The  creative  incentive  is  directed  toward  ends  more  ser- 
viceable to  the  community  than  are  the  incentives  of  pure 
profit  and  possession,  and  the  tendency  to  consider  business 

8 


Economic  Expression  of  Instinctsf  9 

as  one  of  the  professions  is  a  sign  that  more  and  more  men 
endowed  with  the  creative  incentive  will  play  a  leading 
part  in  the  business  world.  Managerial  positions  are  de- 
manding in  larger  and  larger  proportions  trained  en- 
gineers whose  chief  ambition  is  not  mere  size  of  salary, 
but  size  of  achievement.  An  economic  society  in  which 
men  imbued  with  this  motive  come  to  the  top  obviously 
has  high  social  advantages. 

But  what  of  the  rank  and  file?  Does  an  instinct  of 
constructiveness  exist  in  a  coal  miner  or  a  machine  feeder  ? 
Probably  most  business  men  have  believed  at  one  time  or 
another  that  the  great  bulk  of  laborers  are  utterly  lacking 
in  creative  ambition  and  are  dominated  by  an  innate  lazi- 
ness, a  native  disposition  to  soldier  on  the  job.  In  spite 
of  a  widespread  impression  of  this  sort  there  have  de- 
veloped in  the  industrial  world  hundreds  of  plant  organi- 
zations where  the  laborers  speed  up  production  spontane- 
ously, enjoying  the  effort,  displaying  keen  enthusiasm  and 
a  real  instinct  of  workmanship.  What  has  often  been 
thought  to  be  a  disposition  to  loaf  is  found  to  be,  on  the  con- 
trary, a  lack  of  opportunity  for  expression  of  a  dormant 
impulse  to  create  and  construct. 

Modern  machine  industry  not  only  fails  to  present  an. 
opportunity  for  creative  expression  but  positively  stifles 
inclinations  in  that  direction.  To  quote  Herbert  Hoover, 
"With  the  high  specialization  and  intense  repetition  in 
labor  in  industrial  processes  there  has  been  a  loss  of  crea- 
tive interest. ' '  ^  And  from  a  business  viewpoint,  John  D. 
Rockefeller,  Jr.,  states,  ''What  joy  can  there  be  in  life, 
what  interest  can  a  man  take  in  his  work,  what  enthusi- 
asm can  he  be  expected  to  develop  on  behalf  of  his  em- 
ployer, when  he  is  regarded  as  a  number  on  a  payroll,  a 
cog  in  a  wheel,  a  mere  'hand'?"^  In  the  same  vein  an 
industrial  engineer  of  wide  experience  writes,  "If  we  take 
the  standard  of  production  as  one  hundred,  I  can  say  that 
it  is  impossible  to  force  a  man  much  above  fifty  and  even 
then  after  a  few  days  he  will  become  rebellious  and  lag 

1  Industrial  Management,  May,  1920,  p.  346. 

2  Ibid.,  Nov.,  1919,  p.  404. 


10  Economic  Expression  of  Instincts 

and  the  quality  of  the  work  will  suffer.  But  if  the  creative 
power  of  that  man  be  stimulated,  he  can  almost  constantly 
touch  one  hundred,  apparently  without  the  slightest 
effort."^ 

Recent  experience  in  industrial  effort  is  sufficient  to  in- 
dicate that  production  is  doomed  to  remain  at  low  levels, 
labor  unrest  is  inevitable,  human  satisfaction  in  workman- 
ship is  out  of  the  question,  high  economic  standards  are 
hopeless  unless  industrial  organization  devises  ways  and 
means  for  bringing  out  this  potential  energy  of  the  worker. 
A  due  expression  of  the  instinct  of  workmanship,  both  in 
employers  and  in  employees,  has  profoundest  bearings 
upon  wealth  production. 

The  Instinct  of  Possession 

Ownership,  like  constructiveness,  satisfies  a  natural 
craving.  Men  instinctively  seek  to  acquire  objects  of  which 
they  can  say,  "These  are  mine." 

For  a  large  class  of  people  this  impulse  is  paramount. 
To  possess  more  and  ever  more  brings  to  them  the  great 
joy  of  li\dng.  They  are  insatiable;  they  never  possess 
enough.  The  possession  of  money,  or  the  property  or 
goods  which  it  represents,  gives  a  real  relish  to  life,  and 
they  acquire  purely  for  the  sensation  of  possessing  on  a 
gigantic  scale.  This  motive  has  amassed  many  of  the 
multimillionaire  fortunes  of  the  present  day  and  has 
driven  men  on  to  the  accumulation  of  properties  vastly 
beyond  the  point  where  the  properties  could  do  them 
any  personal  good. 

Men  animated  primarily  by  acquisitiveness  are  found 
remarking,  "I'm  not  in  business  for  my  health,"  or  "I'm 
after  my  pile  and  I'm  going  to  get  it,"  or  "I  admit  I'm 
after  the  Almighty  Dollar.  Business  is  business."  Men 
in  whom  this  impulse  is  supreme  have  frequently  been 
notorious  for  lack  of  a  high  social  and  ethical  sense.  When 
carried  to  extremes  under  its  spell  some  captains  of  in- 
dustry have  discredited  themselves  in  the  public  esteem. 
But  it  has  proved  one  of  the  most  irresistible  of  human 

1 W.  R.  Bassett,  "When  the  Workmen  Help  You  Manage,"  p.  254, 


Economic  E oppression  of  Instincts         11 

motives  and  has  fired  men  of  great  genius  to  mighty  ac- 
complishments, sometimes  good,  sometimes  otherwise. 

The  wage  worker  too  has  a  possessive  disposition.  In 
the  eyes  of  the  employer  the  wage  worker  often  appears 
to  be  animated  almost  solely  by  avarice  for  higher  wages. 
There  are  many  obstacles  however  to  the  worker's  expres- 
sion of  such  an  instinct.  The  worker  has,  of  course,  no 
claim  to  possession  of  the  machine  which  he  operates,  or 
of  the  raw  material  which  he  handles,  or  of  the  finished 
product  which  he  turns  out.  He  has  no  possessive  title  to 
his  job;  his  employer  has  the  right  to  hire  and  fire  at  will. 
If  he  lives  in  a  tenement  district  or  a  company  town  he 
owns  nothing  in  the  form  of  a  house,  a  garden,  or  a 
lawn.  One  thing  he  does  own,  however,  and  that  is  his 
labor.  This  he  possesses  and  aims  to  sell  under  as  good  a 
bargain  as  he  can  strike.  Here  his  impulse  of  possession 
often  comes  into  vehement  play.  Demands  for  wage  in- 
creases come  in  rapid  succession.  A  great  labor  leader  has 
offered  to  digest  the  aims  of  labor  under  three  headings, 
"More,  more,  more."  Laborers  assert,  "We're  not  in 
for  a  boom  unless  it  booms  us. ' '  Wage  incentives,  bonuses, 
piece-rates,  rewards,  are  the  ceaseless  efforts  of  progressive 
employers  to  control  and  harness  the  workers'  acquisitive 
nature. 

Farseeing  employers  have  in  some  instances  endeavored 
to  link  the  possessive  instincts  of  the  workers  with  the  best 
interests  of  the  business  by  such  devices  as  stock  ownership, 
profit-sharing  and  thrift  plans.  It  is  anticipated,  for  in- 
stance, that  ownership  of  a  few  shares  of  common  stock 
with  attendant  dividends,  will  stimulate  feelings  of  owner- 
ship which  will  identify  the  workers'  interests  with  the  in- 
terests of  stock  holders  generally.  The  response  to  this 
sort  of  stimulus  is  still  of  doubtful  force. 

Not  all  business  men,  however,  or  aU  laborers  are  dom- 
inated by  the  love  of  possession.  A  recent  observer  has 
ventured  to  write,  "The  real  news  about  business,  it  seems 
to  me.  is  that  it  is  being  administered  by  men  who  are  not 
profiteers.  The  managers  are  on  salary,  divorced  from 
ownership  .  .  .  the  motive  of  profit  is  not  their  personal 


12  Economic  Expression  of  Instincts 

motive. ' '  ^  Managers  are  on  the  increase  whose  paramount 
motives  are  similar  to  those  of  the  soldier  or  the  doctor  or 
the  teacher  or  the  engineer, — non-possessive.  Moreover,  the 
frequent  accusation  that  all  labor  wants  is  more  wages 
fails  to  take  into  account  the  workers'  non-financial  in- 
stincts. After  all,  the  latter  group  of  instincts  is  funda- 
mental in  the  worker's  life.  To  quote  again  Mr.  Rocke- 
feller, Jr.,  "A  man  who  recently  devoted  some  months  to 
studying  the  industrial  problem  and  who  came  in  con- 
tact with  thousands  of  workmen  in  various  industries 
throughout  the  country  has  said  that  it  was  obvious  to  him 
from  the  outset  that  the  working  men  were  seeking  for 
something  which  at  first  he  thought  to  be  higher  wages. 
As  his  touch  with  them  extended,  he  came  to  the  con- 
clusion, however,  that  not  higher  wages  but  recognition 
as  men  was  what  they  really  sought."^  President  Wilson's 
Second  Indu.strial  Conference  reported,  "It  cannot  be 
denied  that  unrest  in  our  industrial  community  is  charac- 
terized more  than  ever  before  by  the  purposes  and  desires 
that  go  beyond  the  demand  for  higher  wages  and  shorter 
hours. ' ' 

It  is  obvious  that  with  both  employers  and  employees, 
even  where  money-getting  appears  the  chief  aim  in  life, 
the  money  itself  may  be  but  a  means  to  an  end.  The  real 
end  and  aim  may  be  creating  a  new  invention,  attaining  a 
position  of  power  or  prestige  or  making  possible  a  higher 
standard  of  living  for  one's  family.  All  of  the  satisfac- 
tions of  life  are  given  a  price  value.  In  order  to  satisfy 
the  non-possessive  desires  men  have  to  acquire  money.  The 
end  and  aim  of  economic  endeavor  in  such  cases  is  not 
acquisition  merely  for  the  sake  of  acquisition.  The  real 
end  and  aim  is  to  satisfy  non-financial  wants  and  am- 
bitions. 

But  after  all  allowances  have  been  made  for  these  ex- 
ceptions and  qualifications  the  fact  remains  that  the  pos- 
sessive instinct  has  a  driving  dynamic  power  in  the  eco- 
nomic world.    A  sheer  delight  in  the  collection  of  a  huge 

1 W.  Lippmann,  "Drift  and  Mastery,"  p.  45. 
2  l7idusirial  Managemevt,  Nov.,  1919,  p.  404. 


Economic  Expression  of  Instincts  13 

fortune  has  impelled  men  to  tireless  business  effort  and 
has  molded  and  directed  perhaps  more  than  any  other 
single  motive  the  economic  system  that  now  prevails.  The 
possibility  of  its  modification  or  partial  displacement  by 
other  instincts  has  momentous  significance  for  the  economic 
community  in  the  future. 

Disposition  to  Self-Assertion 

In  the  field  of  labor  leadership  it  is  common  to  find 
personalities  who  are  moved  not  primarily  by  acqusitive- 
ness  but  by  an  intense  impulse  of  self-assertion  and  mas- 
tery. The  prevalence  of  such  an  instinct  in  varying  de- 
grees of  intensity  is  conspicuous  in  all  business  circles. 
Self-assertive  managers  are  fond  of  the  warning,  "This 
is  my  business,  I  will  run  it  as  I  please."  Out  of  des- 
perate rivalries,  weathering  of  financial  depressions,  cut- 
throat competition,  the  most  self-assertive  men  are  apt  to 
emerge  triumphant,  and  to  wield  the  power,  mastery  and 
leadership  that  they  have  M'on.  The  consciousness  of  such 
power  brings  to  thousands  of  great  captains  of  industry 
the  sweetest  satisfaction  which  life  affords  and  to  attain 
to  the  heights  of  it,  they  give  lifetimes  of  hazard,  worry 
and  exhausting  toil.  The  ambition  to  win  admission  to  an 
inner  circle  of  financiers,  to  be  quoted  in  affairs  of  great 
moment  in  the  daily  press,  to  be  sought  out  for  advice  on 
legislative  or  international  policies,  to  affect  Presidential 
campaigns,  to  hold  high  office  on  commercial  committees, 
to  swing  a  backing  of  100,000  union  men,  in  short,  to  ex- 
ercise power  in  the  tide  of  human  affairs,  is  one  of  man's 
most  potent  incentives  to  mighty  deeds. 

For  some  people"  it  is  sufficient  satisfaction  merely  to 
hold  the  power.  They  prefer  to  be  confidential  adviser 
to  the  president  of  the  concern,  to  direct  silently  and  un- 
seen the  major  affairs  of  the  board  of  directors.  They  are 
satisfied  to  boss  behind  the  scenes,  to  pull  quietly  the 
strings  for  other  men  to  jump.  They  enjoy  the  power  for 
its  own  sake,  without  ostentation  or  show  or  publicity. 

But  more  frequently  the  self-assertive  character  yields 
to  the  thrill  of  prestige  and  fame.     He  wants  to  be  known 


14  Economic  Expression  of  Instincts 

as  the  great  railroad  genius.  He  wants  liis  position  to  be 
heralded  as  great.  He  wants  other  big  men  to  know  that 
he  is  big  and  he  wants  little  men  to  recognize  his  superi- 
ority. To  him  power  without  fame  is  nothing ;  power  with 
fame  is  everything.  Publicity  gives  the  finshing  touches 
to  self-assertiveness. 

As  with  business  leaders  so  with  labor  leaders  there 
are  different  types.  The  walking  delegate  is  in  disrepute 
because  of  his  extreme  self-assertiveness.  He  has  on  vari- 
ous occasions  swaggered  into  a  shop,  peremptorily  ordered 
a  strike  and  laid  do-wn  an  ultimatum,  just  to  let  every- 
body know  who  is  boss  around  the  works.  His  excessive 
craving  for  "showing  off"  his  power,  his  extreme  desire 
for  ostentation  and  display,  has  made  him  a  feared  and 
hated  figure  in  the  industrial  world.  There  are  just  as 
many  labor  leaders  of  another  type  who  have  built  up 
reputations  for  sober  and  conservative  use  of  the  enormous 
powers  in  their  hands,  with  little  care  for  fame  and 
publicity. 

The  ordinary  laborer  has  this  same  impulse  to  self- 
assertiveness,  even  though  often  not  in  so  powerful  a 
degree,  and  his  insistence  on  expressing  the  impulse  is  the 
direct  cause  of  much  economic  difficulty.  The  status  of 
labor  as  a  mere  "hand,"  a  commodity  to  be  bought  and 
sold  like  coal  or  pig  iron,  has  been  challenged  by  workers 
demanding  a  new  status  of  recognition  and  power.  The 
demand  for  a  voice  in  those  industrial  issues  which  affect 
the  welfare  of  labor,  the  movement  for  employee  repre- 
sentation and  the  assertiveness  of  modern  labor  unions  are 
traceable  to  an  instinctive  desire  to  have  some  real  control 
over  one's  own  work  and  life.  The  great  obstacle  to  suc- 
cessful welfare  work  is  the  fact  that  the  laborer  has  little 
or  no  voice  in  directing  the  welfare  policies.  The  use 
of  shop  committees,  employee  representation  and  "indus- 
trial democracy"  plans  is  an  endeavor  on  the  part  of  busi- 
ness men  to  harness  this  instinct  of  self-assertion  and  self- 
control  to  the  interest  of  the  business.  Ideas  of  coopera- 
tion, or  partnership,  or  even  of  a  share  in  management 
between  laborer  and  employer  are  a  product  of  this  deep- 


Economic  Expression  of  Instincts         15 

seated  human  tendenc}'.  The  worker  craves  the  satisfac- 
tion of  a  degree  of  power  and  independence  in  his  job 
and  far-sighted  employers  are  endeavoring  to  invent  safe 
and  sound  Avays  and  means  to  bind  this  outburst  of  human 
feeling  to  the  practical  necessities  of  successful  business. 

Most  laborers  too  are  highly  susceptible  to  appeals  of 
display  and  show  in  their  self-assertiveness.  "Pace  set- 
ters" and  "speeders"  gloat  over  their  superior  skill  and 
efficiency,  and  as  a  guard  against  their  spurts  of  extreme 
energy  labor  unions  have  widely  established  a  standard. 
This  standard  is  supposed  to  be  the  pace  that  a  man  can 
follow  safely  for  a  lifetime.  Rivalry  and  competition  be- 
tween individuals  and  departments  is  a  means  of  firing 
their  self-assertive  impulses  by  the  prospect  of  display. 
Prizes  for  machine  operatives,  photos  of  the  fastest  rivet- 
ers, posting  of  the  relative  rating  of  girls  at  telephone 
switchboards,  all  are  utilized  to  draw  upon  the  vanity  of 
the  worker  and  secure  maximum  self-assertion  along  pro- 
ductive lines. 

Thus  the  self-assertive  impulses  offer  potential  sources 
of  rich  energy  for  economic  activity.  Self-expression, 
mastery,  leadership,  power,  display,  fame, — all  these  alter 
the  courses  and  consequences  of  the  economic  order,  and 
lie  at  the  center  of  economic  science. 

Instinct  of  Submissiveness 

In  contrast  with  the  self-assertive  impulses  must  be  con- 
sidered the  submissive  impulses.  Many  men  enjoy  inertia, 
indifference,  apathy,  lethargy.  The  line  of  least  resistance 
is  to  let  well  enough  alone,  accept  things  as  they  are  and 
be  content.  To  turn  over  the  worries  and  risks  and  prob- 
lems to  strong  leadership  is  satisfying.  The  slave  often 
preferred  his  slavery  to  the  responsibilities  of  freedom,  and 
the  worker  often  prefers  unconditional  acquiescence  in  all 
the  mandates  of  the  shop,  be  they  harsh,  or  pleasant,  to  the 
responsibilities  of  some  form  of  industrial  citizenship.  The 
agitator  encounters  at  every  turn  the  willingness  of  his 
audience  to  bow  to  the  inevitableness  of  things  as  they 
are.    The  labor  union  organizer  is  lucky  to  be  able  to  get 


16  Economic  Expression  of  Instincts 

even  a  minority  in  the  industry  to  sign  up,  pay  dues,  at- 
tend meetings  and  shape  policies;  the  rest  find  it  too  much 
trouble. 

In  national  and  state  political  conventions,  it  is  notori- 
ous that  time  and  again  the  slate  is  "doped  out"  by  a 
boss  or  inside  party  leader;  and  the  convention,  relieved 
of  the  awful  puzzle,  receives  the  announcement  with  as 
great  applause  and  hurrah  as  if  it  had  shouldered  the 
burden  itself.  The  doctrine  of  non-resistance  or  pacifism 
applied  to  industrial  life  meets  the  impulses  of  hundreds  of 
thousands  in  the  rank  and  file.  Roosevelt's  warning  not 
to  "Chinafy"  the  U.  S.  was  an  effort  to  bring  home  to 
a  people  in  a  political  way  the  lesson  of  the  fruits  of  sub- 
missiveness,  and  the  lesson  is  fully  applicable  to  industrial 
affairs.  The  success  of  an  open  or  a  closed  shop  cam- 
paign must  depend  eventually  upon  the  balance  which  is 
struck  between  the  self-assertive  and  the  submissive  in- 
stincts of  the  parties  concerned.  A  campaign  in  a  particu- 
lar industry  "to  smash  the  union"  stakes  everything  upon 
the  belief  that  a  certain  amount  of  submissiveness  of  the 
workers  can  be  counted  upon.  The  corporation  president 
who  claims  that  his  workers  can  bring  any  grievance  or 
suggestion  to  the  superintendent  or  to  himself  personally 
does  not  take  into  account  the  feelings  of  inferiority  and 
self-effacement  in  the  laborer  at  the  prospect  of  such  an 
interview.  But  submissiveness  is  not  by  any  means  always 
forced  upon  the  worker;  it  is  as  often  the  course  of  his 
own  choice.  It  satisfies  a  real  instinctive  desire,  a  vital 
trait  of  human  nature,  and  is  just  as  much  innate  as  any 
of  the  other  major  instinctive  dispositions. 

The  Parental  Instinct 

That  the  parent  feels  an  instinctive  love  for  the  child 
is  too  obvious  to  need  argument.  The  love  of  the  mother 
is  commonly  more  intense  than  the  love  of  the  father,  but 
with  both,  the  affection  between  parent  and  child  is  one  of 
the  most  vivid  experiences  of  life  and  exercises  momentous 
influences  in  the  organization  of  society.  The  desire  of  a 
father  to  be  with  his  children,  to  play  and  romp  or  to 


Economic  Ej^pressiori  of  Instincts         17 

read  and  spin  stories  or  merely  to  watch  their  antics,  leads 
to  a  demand  for  a  shorter  work  day  with  more  leisure  for 
home  enjoyments.  The  desire  to  clothe  and  house  and 
feed  the  laborer's  family  leads  to  demands  for  the  where- 
withal in  the  form  of  increased  wages.  The  desire  to 
improve  the  family  standards  may  lead  the  mother  to  take 
a  factory  job  to  increase  thereby  the  family  income;  or 
conversely  may  lead  her  to  insist  on  remaining  at  home 
to  rear  and  train  the  children  by  her  own  direct  care 
and  supervision.  Actions  which  superficially  look  sordid 
and  greedy  and  selfish  in  labor  groups  are  often  domi- 
nated by  underlying  motives  of  parental  solicitude,  and 
to  cope  with  these  situations,  an  understanding  of  the 
underlying  motives  is  the  height  of  necessity. 

Intimately  allied  with  the  parental  regard  for  one's  im- 
mediate kith  and  kin,  is  an  original  disposition  to  kindli- 
ness toward  one's  fellowmen  generally.  "Wallas  says,  "My 
opinion  is  that  a  certain  degree  of  Love  is  stimulated  by 
our  perception  of  other  human  beings,  both  generally  and 
particularly  when  we  feel  that  it  is  within  our  power  to 
injure  or  benefit  them,"  and  further  he  finds  among  men 
an  "original  Love  and  Pity  for  their  fellow  human  be- 
ings as  such. ' '  ^  And  Thorndike  writes  that  one  aspect  of 
original  kindliness  "is  the  positive  satisfyingness  of  wit- 
nessing behavior  characteristic  of  welfare  in  our  fel- 
lows. .  .  .  The  happy  behavior  of  others  is  pleasant,  as 
flowers  and  sunshine  and  food  are. ' '  ^ 

This  original  trait  finds  expression  in  those  features  of 
modern  economic  life  which  bear  such  names  as  sacrifice, 
reform,  altruism,  public  spirit,  welfare,  humanitarian  mo- 
tives, philanthropy,  uplift,  charity,  service,  the  common 
good,  etc.  Those  people  who  are  steadily  trying  to  "mix 
religion  with  business"  are  merely  bringing  to  bear  the 

1  "The  Great  Society,"  pp.  143,  147. 

2  Thorndike,  "Original  Nature  of  Man."  "Whether  this  last  issue 
{i.e.,  kindliness)  is  a  consequence  of  the  original  bonds  described 
under  the  instinct  of  motherly  behavior  or  is  a  somewhat  indepen- 
dent and  differentlv  specialized  kindliness,  is  of  little  importance  for 
our  purpose.     The  former  is  the  likelier.  .  .  ."  p.  103. 


18  Economic  Expression  of  Instincts 

impulses  whieli  underlie  such  great  parental  conceptions 
as  the  Fatherhood  of  God  and  the  Brotherhood  of  Man. 

These  religious  ideas  are  parental  metaphors,  and 
are  the  stimuli  for  incentives  to  economic  good  will.  Cer- 
tain individuals  are  endowed  with  exceptionally  power- 
ful instinctive  energies  in  this  direction  and  commonly 
become  the  so-called  Public  Spirited  leaders  of  their 
times.  Our  complex  economic  society  is  vitally  de- 
pendent upon  men  of  this  caliber  rising  to  positions  of 
power  and  prominence  from  time  to  time.  Personalities 
of  this  type  take  out  some  of  the  sordid  and  materialistic 
features  of  economic  activity,  and  manage  to  radiate  among 
others  the  contagion  of  their  genuine  love  for  their  fellow 
men. 

The  awakening  of  these  kindly  dispositions  is  the  only 
means  toward  achieving  amelioration  of  some  of  the  black 
pains  of  the  economic  community.  To  quote  Tansley,  ' '  The 
instinct  of  human  tenderness  is  the  hope  of  the  world. ' '  ^ 
The  American  people,  by  responding  to  appeals  for  charity 
during  and  immediately  following  the  World  War,  are 
reported  to  have  saved  the  lives  of  15,000,000  children 
across  the  Atlantic.  Similar  human  impulses  have  brought 
into  being,  especially  during  the  last  ten  years,  a  flood  of 
child  labor  laws,  minimum  wage  laws,  eight  hour  laws, 
workmen's  insurance  laws,  old  age  laws,  maternity  protec- 
tion laws,  factory  sanitation  laws.  Prohibitionist  orators 
saturated  the  public  imagination  with  mental  pictures  of 
the  wrecked  home,  the  beaten  wife,  and  the  degraded 
child,  and  the  constitutional  amendment  was  thereby  as- 
sured. Leaders  in  the  woman  suffrage  movement  inces- 
santly appealed  to  the  women  of  America  to  use  the  ballot 
to  put  the  protection  of  the  law  over  their  sisters  in  in- 
dustry and  their  children  on  the  streets  and  to  put  some- 
thing of  the  gentleness  and  tenderness  of  the  mother's 
spirit  into  politics  and  economics.  An  aroused  public  con- 
science is  intolerant  of  the  sweatshop,  and  resents  the  high 
death  rate  of  infants  among  the  lowest  paid  workers' 
families  in  congested  industrial  centers.  Wherever  suf- 
1  "The  New  Psychology,"  p.  267. 


Economic  E oppression  of  Instincts  19 

fering  and  distress  and  pain  are  found,  there  tends  to  arise 
a  general  social  kindliness  and  pity,  and  if  the  emotions 
are  aroused  intensely  enough,  reform  is  forthwith  achieved. 
In  a  recent  effort  to  organize  the  steel  workers,  union 
delegates  spread  throughout  the  steel  districts  photographs 
of  a  woman  alleged  to  have  been  murdered  by  agents  of 
the  company,  and  thereby  made  a  powerful  appeal  to  the 
general  parental  sympathy  of  the  whole  labor  group. 

Another  outgrowth  of  this  general  disposition  to  care 
for  other  people's  welfare  is  the  solicitude  for  the  welfare 
of  the  succeeding  generation.  The  conservation  of  natural 
resources  makes  an  appeal  directly  to  an  instinctive  de- 
sire to  protect  and  conserve  the  welfare  of  ''our  children's 
children."  Population  questions,  immigration  regulations, 
warnings  of  race  suicide,  all  are  settled  in  light  of  an 
instinctive  concern  for  a  happy  and  comfortable  posterity. 
Even  the  arguments  deciding  the  relative  amounts  of  reve- 
nue to  be  raised  by  loans  and  by  taxation  during  the  war 
were  constantly  guided  by  a  spontaneous  feeling  that  we 
must  not  hand  on  to  the  next  generation  any  larger  burden 
than  might  be  absolutely  necessary.  This  sense  of  social 
responsibility  for  the  economic  and  human  welfare  of  gen- 
erations yet  to  come  is  a  constant,  steadying  influence  in 
shaping  the  direction  of  economic  movements. 

In  a  broad  and  comprehensive  way,  this  original  disposi- 
tion of  kindliness  is  the  same  force  which  is  often  called 
service.  And  service  is  commonly  contrasted  with  selfish- 
ness. Progressive  and  radical  movements,  in  varying  de- 
grees of  course,  throw  out  the  challenge  to  what  is  called 
capitalism  to  establish  a  new  motive  of  service  in  economic 
life.  This  challenge  claims  that  economics  today  is  pri- 
marily animated  by  private,  non-humanitarian,  unsacri- 
ficial  motives.  It  claims  that  it  must  be  animated  by  new, 
public,  social,  humanitarian  motives.  The  retort  often 
flies  back,  that  human  nature  cannot  be  changed.  Out  of 
such  a  mental  battle,  there  emerges  this  much  that  ought 
to  be  obvious,  namely,  that  the  economic  order  at  present 
needs  more  of  the  public  motive,  and  will  suffer  bitter  at- 
tacks unless  this  motive  is  forthcoming, — but  that  any  sud- 


20  Economic  E repression  of  Instincts 

den  shift  to  an  economic  society  which  depended  abso- 
lutely or  even  primarily  upon  altruistic  motives  for  its 
driving  force  would  be  ill  fated.  Economics  must  become 
more  humanitarian,  but  the  process  must  come  by  a  grad- 
ual fusion  of  newly  stimulated  instincts  with  the  old.  To 
grasp  this  balancing  and  proportioning  of  private  and 
public  motives  is  a  first  essential  in  any  attempt  to  under- 
stand the  science  of  economics. 

Sex  Instinct 

Discussing  the  sex  instinct,  McDougall  remarks,  "It  is 
unnecessary  to  say  anything  of  the  great  strength  of  its 
impulse  or  of  the  violence  of  the  emotional  excitement  that 
accompanies  its  exercise."  Probably  the  paramount  eco- 
nomic implications  of  the  sex  instinct  arise  not  so  much  from 
the  expression  of  the  instinct  as  from  its  repression.  The 
consequences  for  economics  of  this  repression  will  be  taken 
up  in  a  following  chapter. 

Some  branches  of  business  depend  to  a  very  substantial 
extent  upon  a  carefully  planned  excitement  of  this  im- 
pulse. Advertising,  for  example,  creates  a  demand  for 
many  lines  of  cosmetics,  candies,  silks,  clothing,  etc.,  by  in- 
genuous forms  of  sex  appeal.  The  method  of  appeal  is 
based  upon  the  desire  to  be  attractive  to  the  opposite  sex; 
hence  any  means  of  securing  beauty  or  becoming  attractive 
is  in  high  demand.  By  different  and  well-known  means 
a  good  proportion  of  the  moving  picture  industry  stakes  its 
success  upon  the  sex  appeal.  "The  dress  models  of  the 
wholesale  clothing  shops  of  New  York  are  undoubtedly 
an  enormously  important  and  determining  factor  in  the  sale 
of  women 's  dresses. ' '  ^  Good  looking  waitresses  in  restau- 
rants, pretty  sales  girls  at  store  counters,  attractive  girls 
on  magazine  covers,  all  enter  into  the  strategy  of  sales- 
manship. Consumers'  motives  in  buying  are  thus  very  fre- 
quently influenced,  even  though  unconsciously,  by  this  sex 
impulse. 

Personnel  administration  encounters  certain  sex  prob- 
lems. Girl  operators  of  machines  are  often  unwilling  to 
1  Ordway  Tead,  "Instincts  in  Industry,"  p.  36. 


Economic  Expression  of  Instincts  21 

wear  safe  clothing  or  head  dress  while  at  the  machines  be- 
cause they  hate  the  looks  of  "safety  first"  styles.  Whether 
to  allow  men  and  women  to  work  in  the  same  or  separate 
machine  rooms,  how  to  maintain  due  protection  and  inde- 
pendence for  women  working  under  men  bosses,  how  to 
keep  the  office  girls  from  spending  too  many  hours  of  the 
day  before  the  mirror,  are  all  personnel  problems  with  a 
sex  basis.  Taken  all  in  all,  however,  the  direct  expression 
of  the  sex  instinct  has  only  minor  relations  to  economic 
life ;  the  instinct 's  greatest  bearing  on  economics  arises  from 
nervous  consequences  of  its  repression. 

The  Gregarious  Tendency 

Thorndike  remarks:  "Man  responds  to  the  absence  of 
human  beings  by  discomfort  and  to  their  presence  by  posi- 
tive satisfaction,"  This  gregarious  tendency  exercises  a 
deep  influence  in  economic  groupings  and  over  the  chief 
policies  which  they  carry  out.  Men  incline  to  huddle  to- 
gether, to  think  and  act  as  a  herd,  to  work  and  fight  by 
groups.  To  mix  with  other  people,  to  be  one  with  them, 
to  feel  their  presence,  brings  a  contagious  pleasurable  sen- 
sation, and  men's  economic  actions  seek  the  maximum  of 
this  positive  gregarious  satisfaction. 

For  one  thing,  the  congestion  of  population  in  urban 
centers  has  causes  directly  traceable  to  this  human  ten- 
dency. The  1920  census  reveals  the  fact  that  approximately 
one-half  of  the  population  of  the  country  is  now  huddled 
inside  the  cities  and  towns  with  populations  above  2500. 
A  fundamental  reason  for  this  concentration  of  people  is 
given  by  McDougall  as  follows:  "It  is  the  crowd  in  the 
toM'ns,  the  vast  human  herd,  that  exerts  a  baneful  attrac- 
tion on  those  outside  it.  .  .  .  As  in  the  case  of  the  animals, 
the  larger  the  aggregation  the  greater  is  its  power  of  attrac- 
tion; hence  in  spite  of  high  rents,  high  rates,  dirt,  disease, 
congestion  of  traffic,  ugliness,  squalor,  and  sooty  air,  the 
large  towns  continue  to  grow  at  an  increasing  rate,  while 
the  small  towns  diminish  and  the  country  villages  are 
threatened  with  extinction."^ 

1  McDougall,  "Social  Psychology,"  p.  302. 


22         Economic  Expression  of  Instincts 

Because  of  the  potency  of  this  instinct  we  are  faced 
with  problems  of  housing,  of  city  transportation,  of  food 
and  fuel  supplies,  of  location  of  industries,  of  organization 
of  markets,  of  immigrant  quarters,  of  Americanization,  of 
adequate  farm  labor,  of  "back  to  the  land"  movements,  of 
class  struggle,  of  economic  organization,  and  of  large  scale 
economic  activity  in  general. 

"It  is,  however,  sensitiveness  to  the  behavior  of  the 
herd  which  has  the  most  important  effects  upon  the  struc- 
ture of  the  mind  of  the  gregarious  animal.  ...  To  know 
that  he  is  doing  what  would  arouse  the  disapproval 
of  the  herd  will  bring  to  the  individual  the  same  pro- 
found sense  of  discomfort  which  would  accompany  ac- 
tual physical  separation,  while  to  know  that  he  is  doing 
what  the  herd  would  approve  will  give  him  the  sense  of 
Tightness,  of  gusto,  and  of  stimulus  which  would  accom- 
pany physical  presence  in  the  herd  and  response  to  its 
mandate.  .  .  .  He  is  more  sensitive  to  the  herd  than  to 
any  other  influence. "  ^  In  thus  emphasizing  the  grega- 
rious factor  in  mental  life  and  behavior  generally,  Trotter 
indicates  an  explanation  of  some  of  the  most  widespread 
economic  phenomena.  Approved  industrial  morale  exists 
where  every  worker  is  so  thoroughly  sensitive  to  the  voice 
of  the  factory  herd  that  he  conforms  wholeheartedly 
to  the  established  rules,  regulations,  standards  and  ideas 
of  the  plant.  Attacks  by  radicals.  Reds  or  agitators  upon 
the  sensitiveness  of  this  unit  herd  are  resented  bitterly. 

In  time  of  strike,  the  herd  is  on  the  aggressive;  it  must 
"hang  together  or  hang  separately."  Men  by  the  thou- 
sands throw  their  lot  in  with  the  striking  crowd,  scarcely 
knowing  the  aims  of  the  strike,  but  feeling  the  urge  to 
stand  by  their  labor  herd.  Employers,  in  similar  form,  rally 
to  the  colors  of  a  leader  who  throws  down  a  challenge  on 
the  open  shop  or  some  other  great  economic  issue,  because 
they  are  sensitive  to  the  influence  of  the  dominant  note 
of  the  employing  group. 

This  is  an  age  of  great  associations  of  labor  and  capital. 

1  Trotter,  "Instinct  of  the  Herd  in  Peace  and  War,"  pp.  32,  40,  114, 
133. 


Economic  Expression  of  Instincts  23 

Employers'  Associations,  Chambers  of  Commerce,  Engi- 
neering Societies,  Rotary  Clubs,  Manufacturers'  Associa- 
tions in  a  great  variety  of  forms  spring  from  the  impulses 
of  men  to  defend  their  rights  in  unison,  to  protect  their 
interests  by  group  action.  Laborers,  through  local  branches, 
international  unions,  and  huge  federations,  struggle  for 
■what  they  conceive  to  be  their  rights,  even  their  self- 
preservation,  by  throwing  their  resources  under  the  con- 
trol of  the  herd,  and  working  and  fighting  with  a  class 
consciousness.  The  shop  committees,  for  instance,  insist 
that  the  natural,  logical  and  useful  labor  unit  is  the  local 
shop  or  plant ;  whereas,  in  sharp  contrast,  the  trade  union 
insists  that  the  right  labor  herd  is  all  men  following  a 
certain  craft ;  and  again  in  further  contrast  the  industrial 
union  insists  that  the  only  adequate  labor  herd  is  one  based 
tipon  all  men  in  a  given  line  of  industry  the  country  over. 
How  best  to  apply  the  gregarious  bond  to  economic  life 
is  therefore  one  of  the  salient  problems  of  the  present  day. 

Moreover  much  of  statesmanship  is  concerned  with  the 
economic  loyalties  of  men  to  different  groups.  The  class 
consciousness  of  labor  in  extreme  forms  found  in  the  social- 
ist pleas  for  the  Internationale,  the  World  Brotherhood, 
the  World  Revolution,  etc.,  is  one  thing;  the  patriotic 
allegiance  to  the  nation  as  sovereign  is  another;  the  sup- 
port of  an  international  League  of  Nations  or  world  gov- 
ernment of  some  sort  is  still  another  thing.  The  distribu- 
tion of  gregarious  feeling  within  these  three  circles  ob- 
viously conditions  world  polities,  national  strength,  inter- 
national commerce,  economic  rivalries,  and  peace  and  war. 

James  remarks,  **Tbe  same  acts  performed  with  a  crowd 
seem  to  mean  vastly  more  than  when  performed  alone." 
Men  experience  comfort  and  pleasure  from  being  in  an 
audience,  or  on  a  parade,  or  at  a  banquet  with  their  fel- 
lows. Labor  organizers  get  a  mass  meeting  and  harangue 
the  crowd  until  they  are  swept  into  the  union  ranks.  The 
spirit  of  the  mob  bursts  out  in  terrific  applause  at  the 
words  of  the  speaker,  whereas  if  the  words  were  imparted 
to  the  individual  on  the  street  they  would  seem  stupidly 
commonplace.     The  lynching  party  reveals  the  staid,  re- 


24         Economic  Expression  of  Instincts 

spected  citizen  furiously  dragging  and  kicking  the  victim 
and  feverishly  tying  the  noose,  and  the  strikers'  mob  com- 
mits acts  of  violence  which  individuals  could  never  be 
persuaded  to  commit. 

The  factory  system,  and  the  use  of  machinery  and  sci- 
ence have  made  modern  economic  life  almost  entirely  a 
social  affair.  The  directions  of  gregarious  expression,  the 
limits  of  herd  organization,  the  centers  of  group  loyalty, 
the  possibilities  of  morale  are  fundamental  economic  issues. 
How  to  control  men  in  the  mass  becomes  a  paramount 
economic  problem. 

Instinct  of  Flight  and  Fear 

In  McDougall's  analysis,  "The  instinct  to  flee  from 
danger  is  necessary  for  the  survival  of  almost  all  species 
of  animals  and  in  most  of  the  higher  animals  the  instinct 
is  one  of  the  most  powerful.  .  .  .  Fear,  whether  its 
impulse  be  to  flight  or  to  concealment,  is  characterized 
by  the  fact  that  its  excitement,  more  than  that  of 
any  other  instinct,  tends  to  bring  to  an  end  at  once  all 
other  mental  activity,  riveting  the  attention  upon  its 
object  to  the  exclusion  of  all  others;  owing,  probably,  to 
this  extreme  concentration  of  attention,  as  well  as  to  the 
violence  of  the  emotion,  the  excitement  of  this  instinct 
makes  a  deep  and  lasting  impression  on  the  mind.  .  .  . 
Fear,  once  aroused,  haunts  the  mind;  it  comes  back  alike 
in  dreams  and  waking  life,  bringing  with  it  vivid  memo- 
ries of  the  terrifying  impression. '  '^ 

Instead  of  fears  of  the  jungle,  modern  business  supplies 
to  all  classes  of  the  community  economic  fears  which  are 
almost  equally  compelling.  Especially  in  periods  of  busi- 
ness depression  is  fear  and  emotion  of  great  force.  Work- 
ers by  the  millions  are  seized  by  the  fear  of  losing  their 
jobs,  with  the  prospect  which  that  entails  of  lost  income, 
privation,  worry  and  distress.  Under  the  spell  of  such  a 
fear,  workers  are  said  during  the  depression  period  to 
have  a  great  spurt  of  workmanlike  efficiency  in  the  hope 
that  a  partial  shut-down  of  the  plant  will  find  them  picked 
1  "Social  Psychology,"  pp.  51,  57. 


Economic  Expression  of  Instincts  25 

for  their  superior  efficiency  to  remain  on  the  job.  In 
describing  these  fears,  Steinmetz  writes,  ' '  Over  most  of  the 
workers  hangs  throughout  all  their  life  the  fear  of  unem- 
ployment, the  fear  of  sickness,  the  fear  of  old  age,  .  .  . 
It  is  these  three  great  fears  which  distinguish  the  majority 
from  the  minority  and  make  the  former  dissatisfied  with 
society."^  In  normal  times  many  employes  build  the 
morale  of  their  men  on  the  fear-emotion  by  giving  every- 
one to  understand  that  a  man  is  waiting  at  the  factory 
gates  to  take  his  place  if  he  fails  to  measure  up  to  the 
employer's  mark.  For  such  a  -policy,  a  liberal  supply  of 
immigrants  and  a  constant  oversupply  of  labor  are  in- 
dispensable. 

Fear  of  the  rival  who  is  trying  to  steal  a  market  from 
his  competitors,  fear  of  bankruptcy,  fear  of  laborers 
threatening  a  strike, — these  grip  the  business  man  from 
time  to  time.  He  may  seek  flight  by  retiring  from  business, 
or  he  may  brave  it  out  by  submissiveness,  or  in  extreme 
cases  seek  escape  by  the  route  of  suicide,  or  he  may  be 
carried  along  through  a  strike,  or  be  pushed  into  bank- 
ruptcy. 

Such  periods  leave  indelible  imprints  on  the  memories  of 
the  victims.  They  are  the  mountain  peaks  of  life  and 
men  ponder,  puzzle  and  wonder  about  them  at  great  length 
after  they  are  past.  Fear  and  flight  smack  of  the  primi- 
tive, of  life  and  death,  of  struggles  for  existence,  and 
arouse  the  whole  nature  to  extremes  of  vivid  experience. 
Insurance  devices  of  many  sorts  have  been  devised  to 
take  out  of  industrial  activity  some  of  the  more  dangerous 
forms  of  fear,  and  to  avert  some  of  its  distressing  con- 
sequences. The  immense  growth  of  both  workers'  and  em- 
ployers' insurance  in  recent  years  is  an  indication  of  the 
desire  of  men  to  diminish  and  control  the  element  of 
fear  in  economic  life.  The  excessive  economic  fears  of  the 
laboring  groups  are  dangerous  factors  in  industrial  life 
for  they  are  active  causes  of  industrial  nervousness,  dis- 
content and  unrest.  A  sound  industrial  morale  is  jeopard- 
ized by  an  extreme  discipline  of  fear,  and  pioneer  indus- 
1  "America  and  the  New  Epoch,"  p.  51. 


26  Economic  Expressmi  of  Instincts 

trial  managers  are  undoubtedly  trying  gradually  to  reduce 
the  fear  element  in  discipline  to  safer  levels  and  to  sub- 
stitute appeals  to  other  human  instincts,  such  as  construc- 
tiveness  or  self-expression. 

Pugnacity  and  Rivalry 

James  remarks:  "Fear  is  a  reaction  aroused  by  the  same 
objects  that  arouse  ferocity.  We  both  fear  and  wish  to 
kill  anything  that  may  kill  us. "  ^  In  the  presence  of  danger 
a  man  may  seek  safety  by  flight,  or  he  may  squarely  fight 
the  danger  off.  The  frig^htened  animal,  when  the  chase 
has  brought  it  to  bay,  will  turn  and  fight  madly  for  its 
life.  To  flee  or  to  fight  is  the  pair  of  alternatives.  The 
manufacturer  whose  existence  is  threatened  by  a  trust  or 
monopoly  may  sell  out  or  retire,  or  he  may  devote  his  whole 
energy  to  a  bitter,  desperate  struggle  to  maintain  his  hide- 
pendence  regardless  of  all  the  tactics  used  to  crush  him. 
In  the  latter  event,  as  James  further  points  out,  "In  many 
respects,  man  is  the  most  ruthlessly  ferocious  of  beasts." 

His  fighting  spirit  is  aroused  when  any  of  his  other  in- 
stincts are  thwarted.  To  obstruct  his  creativeness  or  self- 
assertiveness  or  possessiveness  fires  him  to  a  belligerent 
mood.  Obstacles  which  cross  the  pathway  of  sex  or  gre- 
gariousness  or  submissiveness  bring  forth  aggravation,  and 
the  will  to  brook  no  opposition.  Balk  the  man  in  any  of 
his  motives,  and  pugnacity  and  anger  begin  to  warm  his 
blood.  As  "Wallas  remarks,  "Obstructed  sex  love,  for  in- 
stance, normally  produces  a  violent  outbreak  of  Pugnac- 
ity."^ That  is  to  say,  pugnacity  acts  not  so  much  as  a 
separate  instinct  by  itself,  but  is  the  reaction  when  any  of 
the  other  instincts  are  denied  an  adequate  expression. 

As  a  matter  of  fact,  this  thwarting,  balking,  and  repress- 
ing is  exactly  what  the  economic  environment  accomplishes. 
In  one  way  and  another  and  at  one  time  and  another  the 
economic  environment  checkmates  and  foils  all  of  the  great 
human  motives  and  desires.  Some  of  these  instincts  de- 
serve to  be  thwarted  for  the  safety  of  society,  but  the 
thwarting  of  others  is   dehumanizing  for   the  individual 

1  "Psychology,"   Vol.   IT.   pp.    409-415. 

2  "The  Great  Society,"  p.  54. 


Economic  Expression  of  Instincts  27 

and  dangerous  for  the  community  at  large.  The  conse- 
quence, speaking  in  the  broadest  way,  is  a  widespread  con- 
dition of  antagonism,  pugnacity  and  unrest.  The  repressed 
instincts  produce  a  state  of  nervous  tension  amounting  to 
hostility.  Hence  it  happens  that  most  wars,  be  they 
industrial  or  international,  are  struggles  for  freedom,  i.e., 
struggles  to  remove  the  obstruction,  to  hurl  aside  the  thwart- 
ing force,  to  throw  off  the  repressing  environment.  Pug- 
nacity and  anger  strive  to  hew  and  slash  their  way  through 
to  escape  and  liberty. 

For  example,  the  activities  of  unions  thwart  the  self- 
assertive  dispositions  of  employers  and,  angered  by  such 
opposition,  employers  decide  it  is  time  to  "go  to  the  mat" 
with  labor  and  fight  it  out.  Vice  versa,  the  orders  and  man- 
dates of  an  autocratic  employer  may  so  cross  the  self-assert- 
ive spirit  of  his  workers  that,  furious  at  his  domineering 
policies,  they  will  walk  out  on  a  strike  which  requires  grim 
and  enduring  pugnacity.  So  the  man  intimidated  from 
joining  a  union  by  the  likelihood  of  losing  his  job  is  in  no 
peaceful  frame  of  mind ;  and  the  business  man  who  finds 
his  chance  to  reap  a  fine  profit  blocked  by  the  cunning  of 
a  rival,  nurses  his  aroused  pugnacity  by  the  planning 
of  sweet  revenge.  The  instinct  of  constructiveness,  when 
balked  by  the  installation  of  automatic  machinery,  sets  the 
worker  on  edge  with  hostility  and  he  looks  upon  himself 
as  an  "iron  slave"  to  the  machine.  Unrest  saturates  the 
economic  world, — arising  from  a  maelstrom  of  stifled  de- 
sires and  subdued  motives. 

In  spite  of  all  theories  of  partnership  and  good  will, 
there  remains  all  too  great  an  abundance  of  antagonism 
and  warlikeness  in  the  economic  arena,  and  will  remain 
until  the  economic  environment  calls  forth  a  more  bal- 
anced and  healthy  expression  of  the  instincts  which  when 
balked  are  potent  with  pugnacity.  There  is  no  more  fun- 
damental law  in  all  economics  than  the  law  that  antagonism 
may  be  alleviated  not  by  attempting  to  abolish  the  pug- 
nacious instinct  but  by  providing  wholesome  expression 
for  all  the  great  instincts  of  the  human  being. 

Intimately   allied   with   the   pugnacious   feeling   is   the 


28         Economic  Ejopression  of  Instincts 

spirit  of  rivalry.  Keen  competition  between  business  rivals, 
intense  effort  to  win  promotion,  determination  to  excel  one's 
fellows,  whether  employers  or  employees,  are  forms  of  pug- 
nacious energy  turned  in  the  direction  of  useful  rivalry. 
These  forms  of  rivalry  furnish  a  civilized  outlet  for  much 
of  man's  warlike  energies,  and  sustain  in  large  measure 
the  vigor  and  hardihood  of  economic  endeavor. 

Some  Instincts  of  Minor  Economic  Significance 

Hunting,  housing,  migration  and  play  are  human  ten- 
dencies which,  although  not  as  imi:)ortant  as  others  that 
have  been  considered  in  shaping  economic  conduct,  are 
nevertheless  influential  in  many  lines  of  endeavor. 

Hunting 

Parmelee  observes:  "Indeed  it  has  become  true  in  our 
modern  civilized  society  that  some  impulses  now  find  their 
expression  for  most  individuals  only  in  the  form  of  play. 
For  example,  few  people  to-day  need  to  hunt  for  purposes  of 
securing  subsistence  ....  but  many  indulge  in  hunting 
for  purposes  of  play."^ 

But  the  most  important  diversion  of  this  instinct,  which 
in  his  early  history  kept  man  from  starvation  and  death, 
is  pointed  out  by  Thorndike  as  follows:  ''The  older  indulge 
the  propensity  at  great  cost  of  time  and  money  in  hunting 
beasts,  or  at  still  greater  cost  of  manhood  in  hounding 
Quakers,  abolitionists,  Jews,  Chinamen,  scabs,  prophets, 
or  suffragettes  of  the  non-militant  variety.  Teasing,  bully- 
ing, cruelty,  are  thus  in  part  the  result  of  one  of  nature's 
means  of  providing  self  and  family  with  food:  and  what 
grew  up  as  a  pillar  of  human  support  has  become  so  ex- 
travagant a  luxury  as  to  be  almost  a  vice."  ^  The  popular 
pastime  of  "heresy  hunting"  is  one  of  the  more  recent  reve- 
lations of  the  impulse.  Hunting  down  union  agitators  by  a 
force  of  detectives  and  spies  has  appealed  to  a  considerable 
number  of  business  leaders.  The  hunting  instinct,  merged 
■with  the  instinct  of  pugnacity  and  rivalry,  led  men  into  the 

1  "Science  of  Human  Behavior,"  p.  250. 

2  "Original  Nature  of  Man,"  p.  53. 


Economic  Expression  of  Instincts  29 

struggles  of  cut-throat  competition  with  such  primordial 
intensity  that  it  became  necessary  to  place  drastic  limita- 
tion upon  the  code  of  hunting  and  fighting  practices  in  the 
form  of  a  long  catalogue  of  forms  of  "unfair  competition." 
Raiding  the  Reds,  ferreting  out  the  socialists,  hounding  the 
pacifists,  and  stalking  the  "scabs,"  are  all  modern  twists 
given  to  the  original  hunting  impulse.  Just  as  the  fruits 
of  the  parental  instinct  were  seen  to  be  for  the  most  part 
social  comfort,  kindness,  and  progress,  so,  in  contrast,  the 
fruits  of  the  hunting  instinct  in  modem  economic  life  are 
in  the  nature  of  social  torments,  harryings  and  persecutions. 

The  Homing  Instinct 

The  problem  of  high  rents,  of  housing  workers,  of  build- 
ing new  homes  arises  not  merely  from  the  necessity  of 
protection  from  climate  and  the  elements  but  from  a  true 
instinct  of  shelter  and  habitation.  This  has  been  admirably 
described  by  James  as  follows, ' '  There  can  be  no  doubt  that 
the  instinct  to  seek  a  sheltered  nook,  open  only  on  one  side, 
into  which  he  may  retire  and  be  safe,  is  in  man  quite  as 
specific  as  the  instinct  of  birds  to  build  a  nest.  .  .  .  The 
first  habitations  were  caves  and  leafy  grottoes,  bettered  by 
the  hands :  and  we  see  children  to-day,  when  playing  in  wild 
places,  take  the  greatest  delight  in  discovering  and  appro- 
priating such  retreats  and  'playing  house'  there. "^  The 
'economic  system  to-day  finds  it  difficult  to  serve  this  in- 
stinct adequately, — for  example,  it  is  estimated  that  there 
is  an  urgent  need  for  fully  a  million  new  homes.  How  to 
catch  up  in  the  national  building  program  is  an  urgent 
economic  problem,  and  it  is  being  pressed  for  solution  by 
the  deep  human  impulse  to  have  a  suitable  cover  and  retreat 
for  social  and  physical  comfort. 

The  Instinct  of  Migration 

Under  conditions  favorable  to  the  exercise  of  the  impulse, 

many  men  take  delight  in  continually  moving  from  place 

to  place.     Habits,  customs,  traditions,  bonds  of  a  thousand 

sorts  to  the  local  community  are  of  no  avail  against  the 

1  "Psychology,"  Vol.  I,  p.  400. 


30  Economic  Expression  of  Instincts 

"roving"  disposition.  Many  of  the  serious  problems  of 
labor  turnover  consist  in  finding  strong  means  of  satisfy- 
ing impulses  related  to  adventuresomeness.  The  laborer 
who  is  here  two  weeks,  a  hundred  miles  farther  on  the 
next  two  weeks,  and  so  on,  usually  is  acting  under  an  effec- 
tive stimulus  to  his  instinctive  wanderlust,  A  close  connec- 
tion exists  between  this  love  of  being  on  the  go  and  a  delight 
in  the  physical  and  mental  activity  called  forth  by  ever 
new  and  curiosity-provoking  experiences.  Exploration 
satisfies  curiosity.  The  appetite  for  newness  inspires  rest- 
lessness. Many  an  employer  chafes  at  the  experience  of 
remaining  in  one  line  of  business  long  at  a  time;  he  seeks 
new  business  fields  to  explore.  Millions  of  employees  each 
year  change  their  jobs  under  the  spell  of  what  may  lie 
beyond, — a  process  which,  as  will  be  pointed  out  more  fully 
in  a  later  chapter,  entails  a  heavy  waste  and  disruption  in 
the  economic  organization. 

The  Instinct  of  Play 

Play,  in  the  form  of  games,  amusement,  entertainments, 
exercise,  motoring,  etc.,  is  the  business  man's  method  of 
recreating  his  nervous  force  from  day  to  day,  and  main- 
taining a  state  of  bodily  and  mental  vigor.  Personal  effi- 
ciency, clearness  of  mind,  and  the  power  to  see  hard  business 
ventures  through  without  suffering  a  nervous  breakdown, — 
all  depend  upon  whether  the  individual  has  discovered  the 
art  of  relaxing  his  jaded  nerves,  and  of  draining  the  fatigue 
products  out  of  his  system  by  the  proper  amount  of  play 
and  recreation. 

The  most  effective  forms  of  play  are  undoubtedly  those 
which  involve  considerable  bodily  activity  and  a  real  degree 
of  skill.  Baseball,  golf,  tennis,  football,  etc.,  have  the 
maximum  recreational  value.  But  with  the  advancing  com- 
plications of  the  economic  system,  great  difficulties  to  di- 
rect participation  by  everybody  in  such  sports  have  arisen. 
The  modern  man  has  to  enjoy  his  sport  largely  from  the 
grandstand  and  the  bleachers  as  an  excited  onlooker,  and 
probably  he  enjoys  himself  more  from  the  thrills  of  the 
crowd  spirit,  from  the  high  pitches  of  the  mob  emotion, 


Economic  Eocpresnion  of  Instincts  31 

than  from  the  mere  sportsmanship  of  the  play  itself.  The 
recreational  value  of  this  sort  of  play  has  obvious  limita- 
tions. 

The  need  of  the  worker  for  recreation  is  no  less  impera- 
tive. However,  he  finds  participation  directly  in  the  skilled 
sports  practically  impossible.  He  becomes  an  onlooker, 
and  takes  his  play  by  proxy.  Often  he  seeks  relief  from  the 
tedium  of  his  life  through  thoroughly  unwholesome  ex- 
pedients. "Drinking  and  the  new  sedative  pleasures  of 
smoking  and  saloon  card-games  are  the  vices  of  a  faulty 
economic  system.  .  .  .  They  are  irrational  and  extravagant, 
for  they  sate  appetite  and  deaden  acute  pain,  without  re- 
newing force  or  directing  vigor  toward  the  days  work."^ 
Men  crowd  to  amusement  parks,  beaches,  lakes,  etc.,  for  the 
sake  of  the  shute-the-shute,  or  the  ocean  wave,  or  the  scenic 
railway. 

Patten  explains,  "We  experience  a  bodily  refreshment, 
a  brightening  of  blood  and  tissue,  as  we  watch  the  supple- 
ness of  a  dancer,  the  posturing  of  acrobats,  and  the  beautiful 
delicacies  of  wire  walkers.  We  are  attracted  by  danger, 
and  the  unguarded  trapeze  yields  us  a  pleasant  qualm. 
We  enjoy  the  mock  perils  of  the  scenic  railway  and  the 
real  risks  of  the  popular  'loops'  and  'chutes,'  and  say 
that  they  have  given  us  new  sensations  that  are,  in  fact, 
as  old  as  society  itself.  .  .  .  Amusement  is  stronger  than 
vice  and  can  stifle  the  lust  of  it.  It  is  a  base  of  economic 
efficiency  upon  which  depends  the  progress  of  multitudes."  ^ 
Pioneer  corporations,  being  farsighted  enough  to  perceive 
these  economic  bearings  of  play,  are  utilizing  regular  va- 
cations for  their  employees,  are  conceding  more  time  for 
leisure  attei  working  hours,  are  installing  company  moving 
pictures,  glee  clubs,  orchestras,  baseball  teams,  etc.  Play 
can  serve  to  eliminate  much  friction  and  many  ugly  moods, 
to  improve  the  tone  of  the  factory  morale,  and  to  put  the 
life  of  both  employer  and  employee  on  a  higher  plane  of 
economic  efficiency.^ 

1  S.  N.  Patten,  "The  New  Basis  of  Civilization,"  p.  123. 
2/bwZ.,  pp.  135-143. 

aSee  G.  T.  W.  Patrick,  "Psychology  of  Relaxation,"  especially 
Chap.  II. 


32  Economic  Expression  of  Instincts 

Disposition  to  Mental  Activity 

' '  May  we  not  complete  the  list  by  adding  the  instincts  of 
thought,  reason,  intelligence?"^  writes  C.  S.  Myers  and 
again  states:  "There  is  not  one  nervous  apparatus  for  in- 
stinct and  another  for  intelligence.  We  ought  to  speak  not 
of  instinct  and  intelligence,  but  of  instinct-intelligence, 
treating  the  two  as  one  indivisible  mental  function. '  '^  The 
economic  man  is  not  a  purely  rational  creature,  with  the 
power  of  detached  and  aloof  thought  utterly  free  from  any 
instinctive  drive ;  on  the  contrary,  when  he  thinks  most, 
then  are  most  operative  in  him  the  energies  of  an  innate 
disposition  to  curiosity  and  creativeness  of  the  mind.  So 
Wallas  has  argued  that ' '  Thought  is  a  true  natural  disposi- 
tion. Under  appropriate  conditions,  that  is  to  say,  we  are 
naturally  disposed  to  enter  into  a  state  of  reverie,  during 
which  our  ideas  are  so  combined  and  arranged  as  to  produce 
new  mental  results."^  And  Thorndike  emphasizes,  "In- 
tellect is  of  the  same  flesh  and  blood  with  all  the  instincts, 
a  brother  v,^hose  superiority  lies  in  his  power  to  appreciate, 
harmonize,  use  and  save  them  all.''*  The  remark  of  James 
Harvey  Robinson  is  significant,  "A  creature  which  lacked 
curiosity  and  had  no  tendency  to  fumble  could  never  have 
developed  civilization  and  human  intelligence. ' '  ^ 

The  economic  student  must  come  to  look  upon  his  fellow- 
men  engaged  in  all  the  different  activities  of  making  and 
spending  money  not  as  pure  rationalists  calculating  ways 
and  means  for  overcoming  instincts  and  emotions,  but  as 
men  who  are  expressing  all  their  instincts  in  greatly  vary- 
ing degrees  and  with  all  sorts  of  intensities.  To  think  is 
not  to  combat  or  mortify  instinct,  but  is  to  give  vent  to  the 
highest  and  most  useful  forms  of  instinctive  energy  which 
human  nature  is  heir  to. 

Moreover  all  of  the  other  instincts  tend  to  set  in 
motion  the  intellectual  energies.     The  engineers  who  un- 

1  British  Journal  of  Psychology,  III,  215. 

2  Ibid.,  Ill,  267. 

3  "The  Great  Society,"  p.  176. 

4  "Original  Nature  of  Man,"  p.  310. 
6  Harper's,  Sept.,   1920,  p.  489. 


Economic  Expression  of  Instincts  33 

der  the  urge  of  the  instinct  of  constructiveness  set  about 
the  erection  of  a  railroad  bridge  across  Great  Salt  Lake 
found  a  delight  in  the  scientific  investigations  and  ex- 
periments and  the  mental  concentration  on  ways  and 
means  of  securing  stable  foundations  in  spite  of  the  lake 
muds.  The  instinct  of  pugnacity  gives  rise  to  intense 
thought  on  the  strategy  for  winning  a  strike.  The  self- 
assertive  captain  of  industry  is  given  to  constant  de- 
liberations on  how  to  realize  his  power.  And  so  each  of 
the  instincts  serves  to  set  off  the  energies  of  the  mental 
organism,  and  to  provoke  severe,  prolonged,  profound 
thought. 

As  a  consequence  of  this  intimate  relation  between 
thought  and  all  the  other  dispositions,  it  occurs  that 
thought  is  continually  influenced,  shaped,  and  often  dom- 
inated by  each  and  all  of  the  tendencies  of  human  na- 
ture. The  public-spirited  bank  president  thinks  in  terms 
of  social  responsibility,  whereas  the  profiteering  president 
thinks  exclusively  in  terms  of  private  gain.  The  worker 
subject  to  the  spell  of  economic  fears  thinks  in  terms  of 
a  class  philosophy  which  promises  to  alleviate  his  fears. 
In  general,  those  opinions  of  which  we  are  surest  are  the 
ones  which  are  most  dominated  by  the  instincts.  To  quote 
Trotter,  "As  a  matter  of  fact,  it  is  just  those  fundamental 
propositions  which  owe  their  origin  to  instinct  which  ap- 
pear to  the  subject  the  most  obvious,  the  most  axiomatic, 
and  the  least  liable  to  doubt  by  any  one  but  an  eccentric  or 
a  mad  man.  When,  therefore,  we  find  ourselves  enter- 
taining an  opinion  about  the  basis  of  which  there  is  a 
quality  of  feeling  which  tells  us  that  to  inquire  into  it 
would  be  absurd,  obviously  unnecessary,  unprofitable,  un- 
desirable, bad  form,  or  wicked,  we  may  know  that  opinion 
is  a  non-rational  one,  and  probably,  therefore,  founded 
upon  inadequate  evidence."  ^  In  other  words,  just  when  we 
feel  most  certain  of  our  opinion,  we  are  apt  to  be  most 
the  victim  of  our  instinctive  nature. 

Among  opinions  carrying  this  feeling  of  certitude  are 
those  common  convictions  about  the  divine  right  to  strike, 

1  Trotter,  "Instincts  of  the  Herd  in  Peace  and  War,"  pp.  44,  96. 


34         Economic  Eocpression  of  Instincts 

or  the  rights  of  private  property,  or  the  so-called  "Ameri- 
can" or  open  shop,  or  the  doctrines  of  economic  radicalism, 
or  conceptions  of  freedom  of  contract,  or  of  the  sanctity  of 
the  courts,  and  so  on.  About  these  matters  most  people 
have  settled  and  emphatic  opinions,  and  any  question  about 
them  is  a  question  about  something,  to  quote  James,  ' '  need- 
ing no  proof  but  its  own  evidence."  And  James  further 
explains,  "And  we  may  conclude  that  to  the  animal  which 
obeys  it,  every  impulse  and  every  step  of  every  instinct 
shines  with  its  own  sufficient  light,  and  seems  at  the  mo- 
ment the  only  eternally  right  and.  proper  thing  to  do."^ 
Consequently,  our  convictions  about  economic  fundamen- 
tals ought  not  to  be  treated  as  if  they  were  uniformly 
the  outcome  of  uninfluenced  rationalism,  but  should  be 
recognized  for  the  instinctive  products  which  in  so  large  a 
degree  they  really  are.  The  play  of  economic  forces  makes 
for  a  constant  flux  and  evolution  in  the  economic  organ- 
ization, all  of  Avhich  creates  in  many  and  diverse  ways  a 
new  status  for  property,  a  new  status  for  labor,  and  a 
new  status  for  consumers  generally.  Each  alteration  of 
status  requires  changed  opinions  and  new  forms  of  thought. 
Because  so  many  of  the  old  convictions  are  primarily  in- 
stinctive, it  is  extremely  difficult  for  men  deliberately  and 
rationally  to  adapt  their  minds  swiftly  enough  to  jthe 
new  facts  of  the  economic  environment.  Instinctive  opin- 
ion, engendered  as  it  is  in  large  degree  by  the  suggestibility 
of  the  herd  and  fixed  as  it  is  by  mental  habit,  finds  great 
difficulty  in  making  adjustments  to  new  inventions,  new 
industrial  relations,  new  economic  facts. 

But  this  is  only  one-half  of  the  story,  for  just  as  truly 
does  thought  in  turn  influence  and  control  the  impulses 
struggling  for  release.  Every  time  that  sex,  pugnacity, 
fear,  kindliness  and  the  other  tendencies  find  expression, 
the  experience  takes  on  a  more  or  less  intelligent  sig-. 
nificance,  and  by  the  gradual  exercise  and  growth  of  all 
the  dispositions,  experience  builds  up  an  accumulation  of 
ideas,  solutions,  convictions  and  thoughts  which  stand 
r^dy  thereafter  to  guide  the  instincts.  So  Parmelee  finds, 
1  James,  "Psychology,"  Vol.   II,  387. 


Economic  Expression  of  Instincts  35 

"Intelligent  behavior  is  therefore  made  up  of  tropic,  re- 
flex, and  instinctive  actions  which  have  been  confined  in 
new  ways  as  a  result  of  experience  so  as  to  constitute  new 
forms  of  behavior. ' '  ^  More  explicitly,  Dewey  shows  that 
"Intellect  ...  is  the  sum  total  of  impulses,  habits,  emo- 
tions, records  and  discoveries  which  forecast  what  is  de- 
sirable and  undesirable  in  future  possibilities,  and  which 
contrive  ingeniously  in  behalf  of  imagined  good.  Faith  in 
the  power  of  intelligence  to  imagine  a  future  which  is  the 
projection  of  the  desirable  in  the  present,  and  to  invent 
the  instrumentalities  of  its  realization,  is  our  salvation. ' '  ^ 

In  no  part  of  the  life  of  society  do  the  non-rational  pas- 
sions of  men  threaten  the  harmony  and  efficiency  that  is 
desirable  more  than  in  the  economic  sphere.  Rivalries, 
class  consciousness,  cut-throat  competition,  depression  and 
prosperity,  these  and  a  hundred  other  common  features  of 
the  economic  order  reveal  instinct  which  has  not  come 
properly  under  the  control  of  this  power  "to  contrive  in- 
geniously in  behalf  of  imagined  good."  In  fact,  a  non- 
intelligent  control  of  sex  leads  to  vice,  of  possessiveness 
leads  to  profiteering,  of  kindliness  leads  to  bankruptcy,  of 
pugnacity  leads  to  war,  of  self-assertiveness  leads  to 
autocracy,  of  submissiveness  leads  to  pacifism,  of  hunting 
leads  to  cruelty.  "Thought,"  says  Dewey,  "affords  the 
sole  method  of  escape  from  purely  impulsive  or  purely 
routine  action.  A  being  without  capacity  for  thought  is 
moved  only  by  instincts  and  appetites,  as  these  are  called 
forth  by  outward  conditions  and  by  the  inner  state  of  the 
organism. ' '  ^  And  he  adds,  referring  to  instinctive  ten- 
dencies, "Most  of  them  are  of  little  use  till  they  are  in- 
telligently combined  and  directed." 

The  controversy  between  those  who  maintain  that  man 
is  almost  wholly  rational  and  those  who  maintain  him  to 
be  an  irrational  animal  seldom  leads  to  useful  conclusions. 
In  the  economic  world,  high  instinctive  energy  gives  in- 
itiative,  ambition,   aggressiveness,   determination,   success, 

1  Pannelee,  "Science  of  Human  Behavior,"  p.  258. 

2  Dewey,  "Creative  Intelligence,"  p.  69. 

3  Dewey,  "How   We  Think,"  p.  15. 


36         Economic  Expression  of  Instincts 

and  these  harnessed  by  keen  intellectual  guidance,  make 
for  economic  progress.  It  would  of  course  be  an  untrue 
claim  that  the  unsuccessful  groups  in  industry  and  com- 
merce are  always  the  irrational  ones,  and  that  the  success- 
ful groups  are  always  most  plentifully  endowed  with 
powers  of  reason.  Success  usually  indicates  high  intelli- 
gence along  some  specific  line,  such  as  engineering  or 
finance.  The  same  brainy  engineer  may  be  a  most  irra- 
tional being  in  his  dealings  with  labor,  in  his  notions  of 
property  rights,  and  in  his  whole  economic  philosophy. 
And  the  uncanny  financial  genius  may  hold  convictions 
about  democracy  which  are  blindly  impulsive  and  would 
not  stand  cool  rational  analysis  for  a  minute.  Business 
has  come  to  be  so  completely  a  matter  of  applied  science 
and  technical  organization  that  none  but  the  quick  and 
efficient  of  mind  can  hope  to  play  a  leading  part  in  it. 
Successful  groups  indicate  a  superior  intelligence  in 
handling  technical  problems,  but  may  just  as  commonly 
indicate  blind  instinctive  fumbling  in  all  the  more  social 
problems  arising  from  economic  acti^^ty. 

Executives  everj^where  complain  of  the  scarcity  of  lead- 
ers who  can  handle  large  groups  of  men  effectively.  When 
the  successful  man  has  to  handle  impulses,  instincts,  moods, 
prejudices  and  emotions  in  the  mass,  he  is  playing  with 
fire.  It  is  difficult  for  him  to  be  patient,  to  size  up  human 
nature,  to  enthuse  and  inspire,  to  create  morale,  to  secure 
loyalty,  to  settle  differences.  These  problems  tend  to  in- 
flame instinctive  opinions  in  his  own  mind,  and  are  the 
most  aggravating  materials  to  handle  in  a  calm,  intelligent 
fashion.  Leaders  of  labor  unions  as  well  as  managers  of 
workers  on  the  executive  staff  of  the  corporation  face  here 
a  most  provoking  problem.  It  is  the  center  of  most  of 
the  irrationalities  of  the  industrial  world. 

As  a  matter  of  careful  observation,  therefore,  it  would 
appear  to  be  a  fair  conclusion  that  economic  success,  and 
intelligence  along  technical  lines,  go  hand  in  hand.  But 
this  observation  would  be  a  futile  one  if  side  by  side  with 
it  were  not  placed  the  equally  important  observation  that 
such  successful  men  may  be  dominated  in  many  of  their 


Economic  Expression  of  Instincts  37 

fields  of  interest  by  the  clearest  kind  of  instinctive  irra- 
tionality. Management  has  its  incompetency  and  irration- 
ality no  less  than  labor,  and  it  is  a  question  later  to  be 
considered  whether  a  large  part  of  the  incompetencies  of 
labor  are  not  due  to  the  fact  that  management  has  allowed 
itself  to  defend  policies  from  blindly  instinctive  motives 
rather  than  from  impartial  analysis  of  the  economic  situa- 
tion. 

There  is  one  field  of  intelligence  which  has  been  de- 
veloping mightily  of  late  years  and  which  holds  out  the 
promise  of  a  more  intelligent  treatment  of  economic 
questions  on  everybody's  part, — that  is,  applied  and  ab- 
stract science.  Scientific  management,  efficiency,  physi- 
cal and  chemical  research,  industrial  laboratories,  psycho- 
logical experimentation, — all  these  are  being  brought  to 
bear  scientifically  upon  the  harassing  problems  of  the  times. 
Of  profound  significance  was  the  recent  statement  by  the 
President  of  the  American  Institute  of  Electrical  Engi- 
neers, "What  is  true  of  the  electrical  art  is  also  true  of 
all  the  other  arts  and  applied  sciences.  They  are  all  based 
upon  fundamental  discoveries  made  by  workers  in  pure 
science  w-ho  were  seeking  only  to  discover  the  laws  of 
nature  and  extend  the  realm  of  human  Knowledge."^ 

And  of  greater  hope  for  the  future  in  the  control  of 
scientific  thought  over  groping  instinct  is  the  situation 
described  by  the  President  of  the  American  Psychological 
Association  in  1919  as  follows: 

"It  has  been  estimated  that  during  the  nineteenth  cen- 
tury the  power  of  the  human  race  to  produce  food,  cloth- 
ing and  shelter  was  doubled  by  the  application  of  increased 
knowledge  to  the  material  elements  of  the  universe.  All 
the  significant  advances  in  knowledge  of  the  material 
world  were  brought  about  by  possibly  a  few  thousand 
progressive  minds  devoted  to  that  study.  ...  It  is  quite 
probable  that  the  productive  power  of  the  human  race 
is  being  doubled  again  during  the  present  century.  .  .  . 
Such  an  increase  in  the  efficiency  of  the  race  will  probably 
be  due  to  the  advance  in  our  knowledge  of  personnel  rather 
lYerkes'  "New  World  of  Science,"  p.  xiii. 


38  Economic  Expression  of  Instincts 

than  to  further  increase  in  our  knowledge  of  the  material 
universe."  In  short,  the  economic  order  is  able  to  go 
through  another  drastic  transformation  because  it  happily 
possesses  a  number  of  minds  animated  by  intense  instinc- 
tive energy,  working  out  along  scientific  lines.  The  instinct 
of  thought  is  pushing  the  whole  thing  along. 


CHAPTER    III 
THE    ORGANIZATION    OF    HUMAN    NATURE 

The  great  fact  of  human  nature  is  not  separated,  un- 
connected tendencies  but  the  whole  man, — all  of  the  origi- 
nal tendencies  organized  into  a  grand  total,  a  unity.  The 
instincts  are  not  single,  separated,  isolated  strands;  they 
are  integrated  into  a  solid,  organic  whole. 

It  has  been  necessary  for  purposes  of  description  and 
analysis  to  take  up  different  dispositions  one  by  one.  There 
is  danger  that  this  unavoidable  method  of  presentation 
will  give  the  impression  that  the  dispositions  can  be  over- 
simplified. Nothing  could  be  further  from  the  intent  of 
the  account;  nothing  could  be  further  from  the  truth. 
As  Thorndike  has  most  emphatically  urged,  "The  original 
tendencies  of  man,  however,  rarely  act  one  at  a  time  in  iso- 
lation from  one  another.  .  .  .  On  the  contrary  they  coop- 
erate in  multitudinous  combinations.  .  .  .  Original  nature 
is  not  a  set  of  perfectly  independent  mechanisms  any  more 
than  it  is  a  hodge-podge  for  chance.  It  is  a  factory  or 
hierarchy  of  mechanisms,  with  very  many  components,  of 
which  many  cooperate  in  response  to  any  one  situation. '  '^ 

For  example,  a  banker  decides  to  organize  a  syndicate  to 
finance  a  $100,000,000  corporation.  His  motives  are 
a  complex  organization  of,  say,  a  desire  for  gain,  a  desire 
for  power,  a  creative  imagination,  a  spirit  of  rivalry,  a 
sense  of  public  responsibility.  The  whole  genius  of  the 
captain  of  finance  is  evoked  and  all  the  motive  powers  of 
all  his  dispositions  become  welded  together  in  establish- 
ing the  new  corporation  on  a  solid  financial  foundation. 
This  unifying  process  of  mind  is  aptly  described  by 
McDougall  when  he  writes,  ''The  various  instincts  become 
organized  in  systems,  and,  with  the  development  of  self- 
1  Thorndike,  "Oi-iginal  Nature  of  Man,"  pp.  10,  196. 


40        The  Organization  of  Human  Nature 

consciousness,  all  these  become  organized  and  duly  subor- 
dinated within  the  one  all-comprehensive  system  which  is 
the  character  of  the  individual  man." 

The  ** economic  man"  is  this  blended,  integrated,  or- 
ganized array  of  original  human  tendencies.  He  is  not  an 
oversimplified  helter-skelter  of  nicely  separated  tendencies 
but  the  whole  man  so  well  described  by  Angell  in  the  fol- 
lowing words,  "Instincts  ....  are  the  basic  activities  of 
mind  ....  In  a  general  way  it  may  be  said  that  all  the 
common  and  persistent  human  interests,  all  the  funda- 
mental forms  of  human  desire,  all  the  more  profound  types 
of  human  emotions  are  based  upon  the  life  of  instinct.  .  .  . 
However  divergent,  then,  the  sources  from  which  ou,r 
native  impulses  flow,  modern  psychology  teaches  without 
reservation  that  our  volitional  life,  our  conduct  and  our 
character  are  built  up  around  these  factors  as  a  center. ' '  ^ 

And  yet,  even  though  the  economic  man  be  so  complex 
and  multitudinous  a  composite  of  tendencies,  we  need 
not  feel  thwarted  and  confounded  in  attempting  to  under- 
stand his  economic  behavior.  The  truth  of  the  matter  is 
that  the  study  of  this  instinctive  nature  of  man  gives  the 
very  kej"  to  economic  behavior  which  best  fits  the  problem. 
For  in  and  through  the  unified  group  there  run  commonly 
certain  master  impulses  w^hich  predominate,  and  these 
guide  the  economic  conduct  of  the  life.  These  ruling  pas- 
sions deserve  to  rivet  the  attention  of  the  student  of  econo- 
mic behavior,  for  they  are  the  best  clues  to  predicting  and 
controlling  human  nature  in  the  economic  field.  As  ob- 
served by  Woodworth,  ' '  Some  tendencies  and  interests  are 
stronger  than  others  in  the  individual,  and  a  well-integrat- 
ed personality  is  organized  about  its  master  motives,  these 
acting  as  selective  agencies  with  respect  to  other  ten- 
dencies."^ 

Instead  of  the  fictitious  banker  assumed  above,  a  real 
case  may  well  be  taken  for  purposes  of  illustration,  Mr. 
Harriman,  the  railroad  banker  and  builder.  In  him  the 
master  impulses  were  love  of  power  and  of  constructive 

1  Angell,  "Chapters  from  Modern  Psychology,"  p.  28. 

2  Woodworth,  "Dynamic  Psychology,"  p.  12P. 


The  Organization  of  Human  Nature       41 

achievement.  When  some  of  his  associates  implored  him 
to  be  more  diplomatic  and  gentle,  and  less  forceful  and 
combative  in  carrying  out  his  ruling  impulses,  his  answer 
was: 

"You  may  be  right  that  these  things  could  be  so  accom- 
plished, but  not  by  me.  I  can  work  only  in  my  own  way.  I 
cannot  make  myself  different,  nor  act  in  a  way  foreign  to 
me.  They  will  have  to  take  me  as  I  am,  or  drop  me. 
This  is  not  arrogance  on  my  part.  I  simply  cannot  achieve 
anything  if  I  try  to  compromise  with  my  nature  and  to 
follow  the  notions  of  others."^ 

By  what  method  then  are  these  driving  forces  of  human 
nature  organized  into  an  integrated  whole?  By  what 
process  does  the  fusion  and  blending  take  place?  How  are 
the  multitudinous  combinations  made  into  the  sum  and 
substance  of  the  character  and  personality  of  the  economic 
man? 

The  answer  is  to  be  found  in  observation  of  the  forms 
which  instinct  expression  takes.  Each  of  the  specific  in- 
stincts tends  to  find  expression  along  certain  well  recog- 
nized lines.  Each  instinct  does  not  fly  off  into  wild, 
haphazard,  totally  unpredictable  expressions.  It  tends  on 
the  contrary  to  work  out  along  fairly  uniform,  general 
lines.  Each  specific  instinct  has  general  tendencies  which 
determine  how  it  shall  work  into  the  whole  fabric  of  char- 
acter. These  general  directions  and  tendencies  of  the 
specific  instincts  may  be  called:  habit,  imitation,  sympathy, 
and  suggestion. 

Habit 

From  the  moment  the  infant  first  grasps  for  playthings, 
through  the  stage  when  the  boy  hoards  marbles,  down  to 
the  days  of  the  acquisitive  real  estate  dealer  who  gets  pos- 
session of  a  thousand  city  lots,  the  instinct  of  possession  is 
settling  into  habitual  modes  of  expression.  All  of  the 
instincts  tend  to  find  habitual  forms  of  outlet.  The  thou- 
sand and  one  little  details  of  everyday  life  and  the  mighty 
concepts  of  industrial  strategy  all  serve  to  organize  the 
iKahn,  "Our  Economic  and  other  Problems,"  pp.  1-22. 


42        The  Organization  of  Human  Nature 

instincts  along  certain  fairly  definite  channels.  In  Thorn- 
dike's  words,  "In  the  last  resort  all  habits  are  formed  in 
the  service  of  instincts,  and  the  great  majority  of  human 
instincts  function  by  being  modified  through  training."^ 

Those  experiences  which  show  a  smooth  working  out  of 
the  instinctive  energies,  which  bring  a  sense  of  satisfaction 
to  the  individual,  which  indicate  that  a  particular  form  of 
expression  of  the  instincts  actually  serves  and  fits  life, — 
those  experiences  are  the  ones  which  tend  to  be  conserved 
in  the  character  of  the  ir dividual.  Under  a  similar  emer- 
gency next  time,  the  same  instinct  will  tend  to  work  out 
along  the  same  channels.  * '  It  is  undoubtedly  the  tendency 
of  all  living  organisms  to  perform  an  action  more  easily 
on  repetition.  After  this  ease  has  been  gained,  the  act 
is  spoken  of  as  a  habit. '  '^ 

Moreover,  once  the  channel  has  become  fairly  well  fixed 
and  ingrained,  the  conscious  mind  will  not  thereafter  have 
to  direct  the  right  expression.  Automatically,  habitually, 
unthinkingly,  the  human  nature  will  take  care  of  itself. 
The  instincts  will  function  quietly  and  scrviceably  of  their 
own  accord,  and  the  thinking  mind  will  be  freed  from  the 
necessity  of  deciding  each  trivial  movement  and  response 
in  the  daily  round  of  duties.  The  thinking  mind  will  be 
freed  to  concentrate  upon  those  higher,  more  enormous, 
more  far-reaching  problems  which  require  constant  origi- 
nality for  their  solution.  Thus  human  nature  comes  to 
be  in  a  large  degree  a  bundle  of  habits  formed  in  the  service 
of  a  bundle  of  instincts. 

Habit,  therefore,  tends  to  bring  about  a  degree  of  uni- 
formity and  sameness  in  human  nature.  It  tends  to  bring 
about  settled  and  stable  modes  of  business.  In  McDou- 
gall's  words,  **In  short,  the  formation  of  habits  by  the 
individuals  of  each  generation  is  an  essential  condition  of 
the  perpetuation  of  custom,  and  custom  is  the  principal 
condition  of  all  social  organization."^  So  habit  facilitates 
the  established  process  of  economics,  and  serves  to  link 

1  Thorndike,  "Original  Xature  of  Man,"  p.  198. 

2  Parmelee,  "Science  of  Human  Behavior,"  p,  254. 
sMcDougall,  "Social  Psychology,"  p.  355. 


Tlie  Organization  of  Human  Nature        43 

the  instincts  in  stabilized  and  settled  ways  to  the  methods 
of  the  economic  order.  The  instincts  of  curiosity  and 
thought  fall  under  the  regime  of  habit  and  we  become 
accustomed  to  think  along  fixed  and  stable  lines.  The  more 
securely  thought  becomes  thus  habitualized,  the  more  diffi- 
cult become  change,  progress,  and  improvement  in  eco- 
nomic processes.  In  the  field  of  thought,  therefore,  habit 
makes  for  a  defense  of  things  as  they  are.  In  organizing 
man's  instinctive  nature,  habit  becomes  the  ally  of  the 
status  quo  and  the  foe  of  whatever  is  new  and  different. 
So  James  remarks,  "Habit  is  thus  the  enormous  flywheel 
of  society,  its  most  precious  conservative  agent."  New 
economic  processes,  new  economic  ideas,  new  economic  in- 
stitutions involve  not  only  the  breaking  of  old  habits,  but 
the  laborious  and  difficult  task  of  forming  new  ones  in 
their  place. 

Imitation,  Sympathy,  Suggestion 

Imitation,  sympathy  and  suggestion  are  three  different, 
yet  related,  phases  of  instinctive  response.  Imitation  re- 
fers particularly  to  the  tendency  to  copy  actions  of  a  social 
group ;  sj'mpathy,  to  the  tendency  to  experience  the  emo- 
tions of  the  group ;  suggestion,  to  the  tendency  to  accept 
without  criticism  the  ideas  and  opinions  of  the  group.  Each 
of  the  instincts,  in  seeking  expression,  tends  to  follow 
along  the  lines  of  behavioristic,  emotional  and  intellectual 
unity  of  the  group.  With  due  allowance  for  individuality, 
originality  and  independence  of  character,  these  tenden- 
cies to  act  as  others  act,  feel  as  others  feel  and  believe 
as  others  believe  serve  to  organize  the  several  instinctive 
energies  into  a  social  whole  which  is  fairly  normal,  typical 
and  standard. 

Owing  to  their  natural  imitativeness,  men  can  accept 
and  assimilate  the  economic  practices  and  customs  of  their 
day  and  age,  and  behave  toward  the  economic  environment 
with  a  high  degree  of  sameness.  As  Parmelee  points  out, 
"Imitation  causes  uniformity  of  behavior  and  concerted 
action,  and  is  therefore  an  important  force  for  association. 
It  is  an  effective  mode  of  transmitting  habits  and  other 


44        The  Organization  of  Human  Nature 

ways  of  doing  things  from  one  generation  to  another."^ 
Hence  imitation,  like  habit,  serves  to  mould  the  instincts 
into  a  support  of  the  established  economic  order  of  things. 
It  thereby  insures  that  the  status  quo  in  economic  life  shall 
die  hard  and  innovation  come  slow.  But  it  is  equally  true 
that  imitation  may  be  made  the  ally  of  economic  progress. 
McDougall  well  says,  ''It  is  only  by  imitation  that  any 
improvement  conceived  by  any  mind  endowed  with  that 
rarest  of  all  things,  a  spark  of  originality,  can  become  em- 
bodied in  the  tradition  of  his  society. ' '"  The  rank  and  file 
of  business  men  adopt  new  inventions  by  gradual  imi- 
tation of  a  certain  few  adventuresome  pioneers  who  first 
try  the  inventions  out  and  prove  them  to  be  a  success. 
The  masses  learn  the  virtue  of  thrift  when  they  observe 
certain  leaders  who  command  great  prestige  setting  the 
good  example.  New  practices  become  established  by  get- 
ting a  few  prominent  authorities  and  leaders  to  champion 
them ;  the  rank  and  file  imitate.  In  brief,  although  imita- 
tion commonly  plays  a  conservative  role  in  the  economic 
order,  it  nevertheless  is  potentially  a  fundamental  force 
for   economic   progress. 

The  tendency  of  sympathy  to  organize  the  emotional 
phase  of  response  is  clearly  stated  by  Woodworth,  "AVhat 
is  certainly  true  ...  is  that  we  have  a  liking  to  have 
others  feel  as  we  do  and  to  feel  as  others  do."^  Economic 
life  teems  with  vivid  emotions  of  fear,  anger,  elation,  de- 
pression, tenderness,  admiration,  anxiety,  jealousy, — the 
emotions  of  our  companions  and  contemporaries,  our  own 
emotions,  at  times  ours  because  theirs,  at  times  theirs  be- 
cause ours.  The  craving  on  the  part  of  the  corporation 
president  for  loyalty  among  his  working  staff  is  a  craving 
for  emotional  solidarity.  The  yearning  on  the  part  of  ag- 
grieved laborers  to  get  the  whole  labor  force  aroused  over 
their  fear  or  hatred  is  a  yearning  to  share  their  emotions 
with  their  crowd.  The  feeling  among  all  sorts  of  economic 
groups  that  ' '  We  must  stick  together ' '  is  the  result  of  this 

1  Parmelee,   "Science   of  Human   Behavior,"  p.   407. 

2  McDougall,  "Social  Psychology,"  p.  335. 

3  Woodworth,  "Dynamic  Psychology,"  p.   189. 


The  Organization  of  Human  Nature        45 

''internal  process  which,"  according  to  McDougall,  "leads 
to  the  stimulation  in  one  person  of  an  emotion  already  ex- 
perienced by  another."  Broadly  speaking,  this  sympathe- 
tic tendency  does  not  make  either  for  organized  conserva- 
tive or  progressive  results,  so  much  as  for  unity  of  feeling, 
solidarity  of  spirit,  group  morale  in  whatever  economic  cir- 
cle or  faction  or  clique  happens  to  be  involved. 

Suggestion  is  a  tendency  to  accept  opinions  which 
are  generally  held  by  one's  fellowmen.  Trotter  speaks 
of  suggestion  as  "the  desire  for  identification  with  the 
herd  in  matters  of  opinion.  In  the  individual  mind 
there  will  be  an  unanalysable  dislike  of  the  novel  in  action 
or  thought.  It  will  be  'wrong,'  'wicked,'  'foolish,'  'un- 
desirable,' or  as  we  say  'bad  form.'  ..."  Accordingly 
trains  of  thought  set  up  by  almost  any  stimulus  lead  into 
fields  of  opinion  which  the  best  authorities  accept,  which 
a  financial  expert  or  a  labor  leader  approve  of,  which  a 
great  scientist  expounds,  and  a  ready  suggestibility  in  the 
minds  of  the  masses  of  people  brings  a  quick  and  natural 
wide-spread  adoption  of  the  orthodox  opinion.  A  sub- 
stantial proportion  of  the  convictions  firmly  held  by  the 
average  man  are  thus  built  up  without  the  process  of  rea- 
soning or  logic.  It  is  enough  that  the  opinions  are  popu- 
lar, or  held  by  a  leader  who  has  his  confidence.  The 
fundamental  ideas  about  freedom  of  contract,  economic 
rights,  advantages  of  socialism  or  capitalism  are  built  up 
among  the  general  run  of  common  folk  by  this  tendency  to 
accept  the  suggestion  of  the  herd  to  which  they  belong. 
Just  as  the  sympathetic  tendency  serves  to  organize  a 
unity  of  feeling  in  economic  groups,  so  the  suggestive  ten- 
dency serves  to  organize  human  nature  around  a  unity  of 
thought  and  conviction. 

"With  habit  playing  a  conservative  role,  and  imitation 
potentially  either  conservative  or  progressive,  and  sympa- 
thy and  suggestibility  making  for  unity  in  feeling  and 
thought,  it  will  be  obvious  that  these  four  factors  exercise 
a  major  influence  in  organizing  all  of  the  dispositions  into 
human  nature  and  human  behavior.  Emphasis  then  is 
rightly  placed  upon  the  compounding  and  combining  of 


46        TJie  Organization  of  Human  Nature 

the  several  dispositions,  rather  than  upon  their  isolation 
and  exclusiveness. 

In  this  upbuilding  of  character,  the  organization  of 
instincts,  emotions,  impulses  and  ideas  into  the  finished 
product  of  human  nature  is  the  work  of  experience.  The 
particular  form  of  combination  in  each  individual  is 
conditioned  by  his  original  nature  plus  nurture.  The 
original  tendencies  are  given  by  heredity,  and  all  sub- 
sequent modification  is  acquired  in  the  life  of  the  indi- 
vidual. This  process  of  modification  tends  to  attach  the 
several  primary  forces  of  human  nature  to  certain  objects, 
institutions,  personal  titles,  and  causes  in  the  outside  world. 
In  consequence,  whenever  the  outside  factor  is  present  as 
a  stimulus,  or  w^hen  the  memory  or  idea  of  it  is  brought 
to  mind,  it  tends  to  call  into  force  the  corresponding  group 
of  instincts,  emotions,  habits,  etc.,  which  have  been  built 
up  by  experience  around  it. 

So  a  worker  becomes  attached  to  a  particular  machine 
which  he  has  operated  for  thirty  years,  and  this  machine 
stands  for  a  vast  background  of  industrial  episodes  and 
experiences.  Another  worker  has  skill  in  a  particular 
branch  of  building,  and  this  skill  as  practised  for  a  life- 
time is  the  central  organizing  feature  of  his  eco- 
nomic experiences.  Another  worker  has  spent  his  best 
days  striving  to  install  a  union  in  his  plant,  and  this  labor 
cause  becomes  the  systematizing  force  in  his  mental  equip- 
ment. A  financier  finds  that  his  profession  of  banking  has 
correlated  and  unified  a  vast  collection  of  experiences 
about  itself  as  a  center. 

But  it  is  not  to  be  intimated  in  the  least  that  all  such 
organization  takes  place  about  a  single  object  or  cause. 
Each  individual  has  a  number  of  environmental  factors 
which  are  pivotal  for  his  character  formation.  The  finan- 
cier will  find  certain  moods  and  wishes  flocking  to  his  mind 
at  the  mention  of  the  word,  socialist ;  another  group  at  the 
mention  of  the  words,  labor  union;  another  group  at  the 
mention  of  the  name  of  a  great  rival  financier.  In  each 
individual  character,  these  outside  factors  will  connote 
great  chunks  of  experience.    Stimulated  by  them,  the  man 


The  Organization  of  Human  Nature 


•1-7 


will  feel  a  certain  series  of  emotions  or  compound  emotions 
made  up  from  a  scattered  mass;  he  will  feel  certain  ten- 
dencies to  action;  he  will  be  wishing  that  he  could  cope 
with  each  pivotal  object  in  certain  instinctive  ways;  he 
will  find  certain  ideas,  opinions,  beliefs,  hovering  around 
the  particular  suggestion  which  the  object  offers.  Some  of 
these  pivotal  groupings  will  be  of  greater,  some  of  lesser 
importance.  But  all  serve  to  occupy  their  due  relative 
importance  in  organizing  the  hates  and  fears  and  hopes 
and  loves  and  convictions  of  the  man  into  a  completed 
whole. 

The  personality  of  the  man  becomes  branded  by  the  out- 
standing interests  which  he  thus  acquires  by  experience. 
The  man  becomes  a  great  "Roosevelt-man,"  or  is  marked 
by  the  influence  of  some  financial  magnate,  corporation 
executive,  reform  leader,  or  labor  chief.  He  becomes  a 
peculiar  type  of  captain  of  industry  or  industrial  engineer. 
He  becomes  a  liberal,  a  conservative,  or  a  radical.  He 
is  stamped  with  certain  characteristic  qualities,  modes 
of  behavior,  emotional  responses.  In  short,  there  become 
certain  strategic  centers  in  his  human  nature  about  which 
all  his  mental  possessions  are  organized.  These  centers 
correspond  to  certain  features  of  his  environment,  econo- 
mic or  otherwise,  and  the  key  to  the  man's  character  lies 
there.  Such  strategic  centers  vary  greatly.  They  may  be 
an  occupation,  an  institution,  a  profession,  a  machine,  a 
personality,  a  great  cause,  a  political  party.  When  groups 
of  men  come  to  develop  among  themselves  similar  interests, 
with  a  common  strategic  center  for  their  instincts,  emotions 
and  thoughts,  they  become  a  nation  and  the  name  of  their 
country  becomes  the  rallying  point  for  their  human  nature ; 
or  they  become  a  class  and  the  name  of  their  class  is  the 
hub  of  the  psychological  wheel,  or  they  become  the  human 
part  of  an  institution  and  the  name  of  the  institution 
serves  to  bring  about  the  concentrations  of  their  life  ex- 
perience. Thus  the  organization  of  human  nature  is  a 
biological  process  in  which  the  inner  nature,  and  the  out- 
side object  acting  as  stimulus,  cooperate  to  create  the 
finished  product  of  the  human  personality. 


48       TJie  Organization  of  Human  Nature 

This  conception  of  economic  psychology  puts  man  at 
the  center  of  economics.  It  is  dynamic  in  its  outlook  and 
conceives  economics  as  a  human  or  social  science.  It 
views  man  not  as  an  inert,  indifferent  mass,  nor  yet  as  a 
purely  rational,  calculating  being,  but  as  a  dynamic  or- 
ganism, moved  by  inherited  instinctive  tendencies,  ener- 
gized from  within,  with  innate  dispositions  to  create  new 
things  by  the  work  of  his  hands,  to  assert  his  powers  among 
his  fellowmen,  to  acquire  some  portion  of  the  wealth  of  the 
community,  to  render  some  service  to  his  community,  to 
be  curious  and  thoughtful  about  perplexing  problems,  to 
express  at  one  time  and  another  and  in  one  way  and  an- 
other his  original  instinctive  nature  through  his  economic 
environment.  In  a  word  it  is  a  blending  together  of  the 
inseparable  sciences  of  dynamic  psychology  and  social 
economics. 

Inequalities  of  Human  Equipment 

The  original  equipment  of  instinctive  tendencies  and 
capacities  differs  very  greatly  between  individuals.  The 
dynamic  drive  of  instincts  varies  in  intensity  from  indi- 
vidual to  individual,  and  the  strength  of  emotions  and 
impulses  shows  endless  variations.  Some  men  are  born 
with  a  gift  of  human  equipment  which  qualifies  them  for 
lives  of  great  achievement  and  successful  leadership ; 
Avhereas  others  are  born  with  so  limited  a  human  equip- 
ment that  they  are  qualified  to  perform  only  the  least 
difficult  of  tasks.  At  no  point  do  these  inequalities  of 
human  power  appear  in  more  striking  extremes  than  in  the 
instinctive  tendencies  to  use  the  mental  powers.  The  glar- 
ing inequalities  of  intelligence  are  susceptible  of  a  fairly 
accurate  degree  of  measurement  through  intelligence  tests. 
It  is  more  difficult  to  subject  instincts,  emotions  and  im- 
pulses to  quantitative  measurement,  but  it  may  safely  be 
assumed  that  the  inequalities  of  the  other  human  tendencies 
and  powers  are  no  less  extreme  or  widespread  than  are 
those  of  the  tendency  and  power  to  think. 

The  technique  of  mental  measurement  made  its  greatest 
advances  during  the  war,  in  the  army  mental  tests  of  the 


The  Organization  of  Human  Nature        49 

drafted  personnel.  Over  one  million,  seven  hundred  thou- 
sand men  in  the  army  were  put  through  these  tests,  and 
their  mental  levels  were  recorded  and  classified.  The 
draft  troops  were  representative  of  all  classes  and  strata 
of  people  and  it  may  be  assumed  therefore  that  the  find- 
ings for  this  group  represent  with  approximate  accuracy  the 
findings  that  would  be  arrived  at  if  it  were  possible  to 
apply  the  test  to  every  individual  in  the  country.  It 
should  be  borne  in  mind,  too,  that  intelligence  tests  are  not 
tests  of  memory,  or  of  knowledge,  or  of  feeling,  but  of 
the  power  of  the  mind  to  think. 

The  plain  facts  revealed  by  these  comprehensive  tests 
are  briefly  as  follows :  About  10  per  cent,  of  the  population 
of  the  country  is  of  very  inferior  intelligence.  The  best 
of  this  group  are  unable  to  get  beyond  the  third  or  fourth 
grade  in  school,  no  matter  how  long  they  attend,  and  the 
others  are  either  on  the  border  line  of  mental  deficiency 
or  are  feeble-minded.  Their  mental  level  is  comparable 
to  that  of  a  child  of  ten  years  or  less.  More  striking  than 
these  facts  are  the  numbers  of  those  individuals  in  the 
country  whose  mental  level  is  comparable  to  that  of  a 
child  twelve  years  of  age  or  less.  Forty-five  per  cent,  of 
the  population  are  limited  in  intelligence  to  that  level. 
Seventy  per  cent,  of  the  population  register  an  intelligence 
equivalent  only  to  an  age  of  fourteen  years  or  less.  At 
the  top  of  the  rating  scale  are  a  group  of  people  of  very 
superior  intelligence  amounting  to  four  and  one-half 
per  cent,  of  the  total  population.  And  just  below  this 
grade  of  intelligence  are  a  group  whose  mental  level  makes 
them  average  college  material,  amounting  to  nine  per  cent, 
of  the  population.  The  sharp  contrast  between  the  two 
extremes  of  very  superior  and  very  inferior  intelligence, 
and  the  enormous  proportion,  nearly  one-half,  of  the  total 
population,  showing  only  a  very  moderate  intelligence,  give 
a  fairly  definite  basis  for  a  conception  of  the  great  ine- 
qualities of  intelligence. 

The  upper  grades  of  intelligence  furnish  the  leadership 
of  society.  From  these  grades  come  the  great  statesmen, 
educators,  officers,  lawyers,  doctors  and  business  executives. 


50        The  Organization  of  Huinan  Nature 

To  the  extent  that  these  groups  of  high  native  mentality 
are  elevated  to  positions  of  power  and  responsibility,  there 
is  some  assurance  of  efficiency  in  economic  and  social  or- 
ganizations. The  grossest  incompetencies  occur,  however, 
when  individuals  of  low  mental  ability  have  power  and 
responsibility  thrust  upon  them.  Democracy  requires  that 
the  influence  of  these  men  in  the  highest  levels  of  intelli- 
gence shall  be  paramount,  for  the  influence  of  the  lower 
levels  is  characterized  primarily  by  non-rational  tenden- 
cies. The  lowest  10  per  cent,  in  the  army  were  deemed 
unfit  to  send  over  seas.  They  are  scarcely  able  to  behave 
with  the  minimum  of  self-guidance  necessary  to  get  along 
in  industry  under  favoriable  circumstances;  and  under 
unfavorable  circumstances,  they  become  the  glaring  mis- 
fits and  frequent  tragedies  of  the  industrial  system.  Just 
above  this  lowest  ten  per  cent,  is  a  group  of  fifteen  per  cent, 
of  the  population  slightly  but  not  much  better  off.  This 
group  includes  many  foreigners  and  many  who  are  illiter- 
ate. They  are  weak  in  initiative  and  show  very  little 
resourcefulness.  To  get  along  in  their  jobs  successfully 
they  requir3  close  supervision  by  men  who  understand 
sympathetically  their  limitations.  The  grades  just  above 
this  level  suffer  from  similar  limitations  and  handicaps  in 
diminishing  degrees.  Industry  abounds  with  individuals 
who  cannot  restrain  themselves  from  outbursts  of  temper 
or  ^rom  irrational  obstinacies;  with  individuals  who  re- 
peatedly make  mistakes  and  who  require  an  unusual 
amount  of  training  before  they  can  perform  their  work 
habitually  and  well;  with  individuals  who  are  unable  to 
think  their  way  out  of  difficulties,  but  who  blunder  and 
fumble  through,  at  great  distress  to  themselves  and  their 
families  and  at  great  waste  to  society.  The  science  of  per- 
sonnel administration  is  a  serious  attempt  to  understand 
and  control  the  great  inequalities  of  intelligence  for  the 
better  comfort  of  the  individuals  and  the  greater  efficiency 
of  economic  society. 

These  facts  indicate  how  misleading  it  is  to  make  sweep- 
ing references  to  "the  people"  or  the  "masses"  as  if  they 
were  all  on  a  dead  level  and  all  alike.    Difference,  not  uni- 


The  Organization  of  Human  Nature        51 

formity,  is  the  cardinal  feature  of  the  human  equipment, 
and  the  inequalities  of  intelligence  between  various  mental 
levels  give  the  real  character  of  the  human  nature  which 
is  of  interest  to  economics.  The  inequalities  of  intelli- 
gence are  matched  by  the  inequalities  of  all  the  instinctive 
tendencies.  The  entire  human  equipment  of  each  indi- 
vidual qualifies  that  individual  to  cope  with  a  certain 
amount  of  responsibility  and  no  more,  and  the  prime 
task  of  economic  democracy  is  to  adapt  the  distribution  of 
power  and  responsibility  in  economic  life  to  the  unequal 
distribution  of  human  equipment.^ 

1  See  H.  H.  Goddard's  "Human  Efficiency  and  Levels  of  Intelli- 
gence," McDougall's  "Is  America  Safe  for  Democracy?";  "Personnel 
System  of  the  United  States  Army,"  1919,  Vol.  I;  L.  W.  Stern,  "The 
Psychological  Methods  of  Testing  Intelligence." 


CHAPTER  IV 
HUMAN  ADAPTATION   TO   ECONOMIC   ENVIRONMENT 

We  are  encircled  by  an  economic  environment.  It  is 
made  up  in  part  of  pig  iron,  India  rubber,  wheat,  automatic 
machines,  elevators  and  an  endless  host  of  material  things. 
It  is  made  up  in  part  of  a  technical  science  of  molding  and 
refining  metals,  of  arranging  dynamos,  machines,  fur- 
naces, railroads  for  productive  purposes.  It  is  made  up 
in  part  of  an  institutional  organization,  involving  relatioUvS 
between  owners  and  non-owners  of  property,  involving 
rights  and  duties  of  property  or  labor,  involving  customs, 
traditions,  ideals,  laws,  principles.  In  the  maelstrom  of 
this  environment  we  carry  on  our  ''wealth  getting  and 
wealth  using  activities."  Here  human  nature  meets  eco- 
nomic environment,  merges  with  it,  absorbs  it,  destroys 
and  recreates  it,  or  succumbs  to  it.  "Man's  impulses  and 
thoughts  and  acts  result  from  the  impact  of  his  nature 
upon  the  environment  into  which  he  is  born." 

In  this  impact  with  economic  surroundings,  human  na- 
ture undergoes  a  constant  process  of  internal  conflict. 
Contradictory  impulses  steadily  appear.  The  man  desires 
to  play  but  decides  to  finish  a  report  instead ;  his  desire  for 
possession  must  compromise  with  calls  for  philanthropy; 
his  family  instincts  must  not  lead  to  undue  promotion  of 
inefficient  relatives;  his  anger  toward  labor  leaders  must 
be  controlled  by  his  calmer  judgment,  and  this  control 
is  in  turn  affected  by  influences  arising  from  his  creative 
ambitions  or  profit  motives,  or  his  love  of  power.  Some 
tendencies  have  to  be  eliminated  altogether,  some  selected 
for  expression,  some  modified  or  redirected.  The  fact  of 
conflict  between  the  great  instinctive  tendencies  however 
is  constant,  and  the  consequences  of  this  conflict  and  the 

52 


Human  Adaptation  to  Economic  Environment    53 

processes  of  its  control  introduce  the  next  step  in  analyz- 
ing economic  behavior. 

The  outcome  of  the  conflict  is  adaptation  of  man's  origi- 
nal nature  to  his  economic  environment.  This  adaptation  is 
in  the  nature  of  a  compromise  between  expression  and  re- 
pression of  instinctive  tendencies.  In  the  economic  en- 
vironment men's  ambitions  find  the  widest  opportunities 
for  expression.  There  are  the  great  financial  achievements 
of  constructive  genius,  the  huge  fortunes  of  successful 
wealth  seekers,  the  concentrations  of  economic  power  in  the 
hands  of  leaders  of  labor  or  capital,  the  bitter  wars  and 
friendly  rivalries  of  industry.  The  native  dispositions  find 
remarkable  opportunity  for  expression  in  every  phase  of 
wealth  relations.  But  at  the  same  time,  repression  is  uni- 
versal. The  economic  environment  is  stubborn  in  demand- 
ing that  a  worker  shall  repress  all  instincts  which  might  lead 
him  to  run  a  machine  in  other  than  the  one  right  way;  or 
that  a  labor  union  shall  obey  an  injunction  restraining  its 
ambitions ;  or  that  managers  of  corporations  shall  curb  their 
self-assertive  longings  in  obedience  to  the  rules  against  un- 
fair competition.  Thus  the  economic  world  insistently  re- 
buffs a  host  of  cravings  and  propensities,  and  obdurately  re- 
quires their  repression  throughout  society.  The  balance 
struck  between  expression  and  repression  constitutes  adapta- 
tion of  human  nature  to  economic  circumstances. 

Growing  out  of  these  two  phases  of  adaptation  are  two 
great  schools  of  economic  viewpoint  and  thought.  Those 
men,  whether  corporation  executives,  labor  organizers,  re- 
formers or  detached  economic  scientists,  whose  attention  is 
glued  chiefly  to  the  splendid  opportunities  for  economic  ex- 
pression of  human  desires  are  w^ont  to  insist  that  if  human 
desires  do  not  harmonize  with  the  environment,  the  human 
desires  ought  to  undergo  a  change.  To  men  of  this  outlook, 
human  nature  is  wrong ;  the  system  is  right.  Keep  the  sys- 
tem; change  human  nature  to  fit  the  system.  Men  are  be- 
lieved to  need  a  new  spirit  of  good-will,  or  to  require  a 
change  of  heart.  The  old  system  will  work  all  right  if  only 
people  will  approach  it  in  the  right  mood.  All  the  normal 
and  right  expressions  of  instinct  can  be  given  in  the  order 


54    Human  Adaptation  to  Economic  Environment 

as  it  is.  If  the  times  seem  out  of  joint,  the  fault  is  in  our- 
selves. Education  to  a  new  viewpoint  is  thought  necessary ; 
training  in  self-control  is  thought  the  sufficient  recourse; 
anything  to  alter  human  nature. 

Simultaneously,  another  group  of  men  in  all  ranks  and 
classes  of  the  business  world  rivet  their  observation  upon  the 
overbearing  proportion  of  repressions  in  economic  life.  To 
them,  the  economic  environment  needs  drastic  alteration  to 
the  end  that  it  may  relieve  human  nature  of  its  worst  re- 
pressions and  furnish  a  more  generous  outlet  for  the  instinc- 
tive tendencies.  The  system  is  wrong;  it  outrages  human 
nature.  The  laws  affecting  economic  enterprise  are  unwise ; 
they  cramp  the  free  assertion  of  men's  spirits.  The  insti- 
tution needs  overhauling,  customs  need  reforming,  organiza- 
tion and  process  need  transformation  the  better  to  give 
opportunities  for  human  nature  to  express  itself.  If  only 
an  amendment  to  the  constitution  can  be  passed,  or  a  new 
system  of  labor  administration  be  introduced,  or  a  new  type 
of  management  installed,  in  short,  if  only  the  system  can  be 
altered,  human  nature  will  be  freed  from  stifling  repressions, 
and  all  will  be  well. 

The  different  viewpoints  have  each  their  share  of  service- 
ability. Their  difference  arises  from  over  emphasizing  one 
phase  of  the  process  of  adaptation.  Each  over  simplifies 
the  problem.  A  sense  of  balance  and  proportion  observes 
that  some  improvements  are  of  one  type,  some  of  another, 
and  most  involve  both.  Human  nature  needs  refinement, 
control,  redirection;  system  needs  constant  readjustment. 
Adaptation  involves  an  equilibrium  between  expression  and 
repression  of  the  instinctive  tendencies. 

This  process  of  adaptation  takes  place  in  a  wide  varict;- 
of  ways.     As  a  means  of  describing  them  in  a  serviceabl 
and  comprehensive  form,  the  following  classification  will  V 
followed:  discipline,  elimination,  sublimation,  rationaliza 
tion,  revolt. 

Discipline 

Discipline  is  a  common  means  of  adapting  human  nature 
to  the  economic  task  of  making  and  spending  money.     The 


Human  Adaptation  to  Economic  Environment    55 

fundamental  necessity  for  discipline  is  so  ably  stated  by 
Thomdike  that  he  may  be  quoted  at  length:  "The  life 
to  which  original  nature  adapts  man  is  probably  far  more 
like  the  life  of  the  wolf  or  the  ape,  than  like  the  life  that 
now  is,  as  a  result  of  human  art,  habit  and  reasoning,  per- 
petuating themselves  in  language,  tools,  buildings,  books, 
and  customs.  .  .  .  The  original  tendencies  of  man  have 
not  been  right,  are  not  right,  and  probably  never  will  be 
right.  By  them  alone  few  of  the  best  wants  in  human  life 
would  have  been  felt,  and  fewer  still  satisfied.  .  .  .  Man 
is  now  as  civilized,  rational  and  humane  as  he  is  because 
man  in  the  past  has  changed  things  into  shapes  more  satis- 
fying, and  changed  parts  of  his  own  nature  into  traits  more 
satisfying  to  man  as  a  whole.  Man  is  thus  eternally  alter- 
ing himself  to  suit  himself.  His  nature  is  not  right  in  his 
own  eyes.  Only  one  thing  in  it,  indeed,  is  unreservedly 
good,  the  power  to  make  it  better."  This  mastery  of  original 
interests  requires  to  *  *  put  the  useful  ones  to  work  and  guard 
against  the  dangerous  ones.  .  .  .  The  native  impulses  and 
cravings  of  man  have  to  be  tamed  and  enlightened  by  the 
customs,  arts  and  sciences  of  civilized  life,  but  every  item  of 
these  arts  and  sciences  was  first  created  by  forces  within 
man's  own  nature.  Instincts  may  be  trusted  to  form  de- 
sirable habits  only  under  a  strong  social  pressure  whereby 
the  wants  of  one  are  accommodated  to  the  wants  of  all."  ^ 

The  economic  system  as  it  now  stands  has  to  its  credit  a 
high  degree  of  success  in  this  disciplinary  control  of  human 
impulses.  The  credit  sj^stem,  the  market  system,  the  pro- 
duction system,  the  management  system,  the  ownership  sys- 
tem all  operate  to  bring  human  nature  under  control  and  to 
harness  the  great  urges  of  men  to  economic  accomplishments. 
What  often  seems  harsh  and  exacting  in  these  economic 
processes  is  often  a  necessary  and  inescapable  yielding  of 
certain  untamed  impulses.  As  T.  N.  Carver  insists,  "Human 
nature  is,  within  limits,  adaptable  and  can  without  harm 
adjust  itself  to  many  non-psychological  conditions  whenever 
there  is  a  mechanical  or  economic  advantage  in  doing  so. 
.  .  ,  Shall  we  school  and  discipline  ourselves  into  conform- 

1  Thomdike,  "Original  Nature  of  Man,"  pp.  280,  281,  296,  311. 


56    Human  Adaptation  to  Economic  Environment 

ity  with  the  conditions  of  successful  living,  or  shall  we  follow 
our  own  proclivities  and  insist  that  it  is  an  unjust  world 
that  does  not  bestow  success  upon  us?  .  .  .  The  progres- 
sive parts  of  the  world,  that  is,  those  parts  where  industry 
has  been  efficient  enough,  and  governments  liberal  enough  to 
permit  considerable  numbers  of  people  to  make  a  living, 
have  all  followed  the  stony  road  of  self-discipline.  .  .  . 
Those  individuals  who  cannot  readily  discipline  themselves 
or  conform  their  behavior  to  the  mechanical  or  economic 
necessities  of  a  situation,  or  who  suffer  serious  harm  from 
such  conformity,  tend  to  be  weeded  out,  while  those  to  whom 
the  self-discipline  which  proves  to  be  mechanically  or 
economically  advantageous  is  easy  and  harmless,  will  tend 
to  survive. ' '  ^ 

This  power  of  adaptation  of  human  nature  to  the  in- 
exorable and  inviolable  requirements  of  the  economic  order 
is  fundamental  in  economic  psychology.  Human  nature 
cannot  be  given  free  reign,  and  allowed  to  carouse  and 
rebel  and  romp  whithersoever  "the  wind  listeth."  For 
"the  capitalistic  system  has  evolved  and  survived,"  to  quote 
John  R.  Commons, ' '  out  of  experiments  and  in  spite  of  con- 
tinuous protests  and  opposition.  And,  I  take  it,  one  reason 
is  that  it  is  a  system  of  repression  of  natural  instincts,  a 
system  of  discipline,  regimentation,  submission  to  foremen, 
superintendents,  executives,  over  whom  the  employees  have 
little  or  no  control.  .  .  It  is  the  business  of  management 
to  sustain  the  credit  system  by  restraining  the  instincts  of 
labor."  ^ 

Elimination 

Elimination  of  dangerous  impulses  is  an  auxiliary  to  dis- 
cipline. Much  of  the  impulsive  nature  behind  hates,  jeal- 
ousies, cruelties,  persecutions,  vices,  fightings,  stealings, 
slaveries  and  inertias  has  to  be  stamped  out  with  a  heavy 
hand.  One  form  of  elimination  is  mere  atrophy  through  dis- 
use. The  mild,  docile,  obedient,  orderly  loyal  worker  is 
apt  to  be  one  in  whom  combativeness  and  pugnacity  have 

1  Quarterly  Journal  of  Economics,  Vol.  35,  pp.  144-146. 
^American  Economic  Review,  Vol.  9,  p.  31^. 


Human  Adaptation  to  Economic  Environment    57 

died  a  natural  death  over  a  period  of  one  or  two  score 
years.*  Self-assertion  may  under  similar  lack  of  stimulus 
wither  up  and  lose  its  force  in  the  worker's  motivation. 
Another  form  of  elimination  is  to  make  the  consequences  of 
the  instinctive  expression  so  unpleasant  and  painful  that  it 
will  thereby  tend  to  be  eliminated.  The  instinct  of  creative- 
ness  and  originality  in  workmanship  may  lead  to  such  great 
distraction  of  attention  from  the  exact  operation  of  the  ma- 
chine that  the  operator  becomes  a  nuisance  and  loses  his 
job,  and  thereby  learns  to  abolish  his  craftsmanlike  long- 
ings. The  instinct  of  pugnacity  and  rivalry  between  busi- 
ness men  may  lead  to  such  damaging  results  as  to  lead  to 
combination  of  business  units  and  the  consequent  substitu- 
tion of  co-operation  for  cut-throat  rivalry. 

The  economic  population  is  replete  with  characters  who 
have  forgotten  how  to  play,  or  who  have  lost  the  parental 
tendencies,  or  who  have  mortified  the  love  of  riches,  or  who 
are  incapable  of  resentment  and  wrath,  or  who  have  given 
up  the  exercise  of  thought,  or  who  know  not  the  meaning  of 
human  tenderness.  In  the  process  of  eliminating  the  dan- 
gerous and  harmful,  it  is  inevitable  that  much  which  is 
valuable  in  character  should  also  be  cast  out.  But  a  civil- 
ized and  safe  economic  institution  of  necessity  strikes  out 
some  of  the  more  brutish  and  incompatible  primitive  ten- 
dencies. Human  nature  allows  thereby  a  wise  and  useful 
adaptation  to  economic  obligation,  and  by  permitting  the 
atrophy  or  stifling  of  non-civilizable  urges  enables  men  to 
subordinate  their  worst  nature  and  capitalize  their  best 
nature  in  economic  endeavor. 

Sublimation 

Sublimation  is  a  method  of  devoting  instincts  which  are, 
so  to  speak,  "loaded  with  dynamite"  to  useful  ends.  Instead 
of  annihilating  the  more  dangerous  energies  of  human 
nature,  we  may  turn  them  into  great  and  good  expressions. 
Freudian  psychology  has  stressed  heavily  the  energy  of  the 
sex  instinct  in  character  formation  and  has  emphasized  the 
possibilities  of  sublimating  the  sex  energies  in  high  and  use- 
ful non-sexual  forms.    Without  debating  at  all  the  extremes 


58    Hujnan  Adaptation  to  Economic  Environment 

of  many  of  the  Freudian  doctrines,  we  may  safely  accept  the 
fundamental  proposition  that  "Sexual  desire  relinqiiishes 
either  its  goal  of  partial  gratification  of  desire,  or  the  goal 
of  desire  toward  reproduction,  and  adopts  another  aim, 
genetically  related  to  the  abandoned  one,  save  that  it  is  no 
longer  sexual  but  must  be  termed  social."  And  again 
Freud  states  of  the  sexual  impulses,  "They  are  diverted 
from  their  sexual  goals  and  directed  to  ends  socially  higher 
and  no  longer  sexual."  ^ 

Parker  has  shown  that  among  the  few  millions  of  casual 
and  migratory  laborers,  fully  90%  are  unmarried  and 
have  no  normal  sex  life ;  that  this  sex  repression  contributes 
to  unrest,  discontent,  and  labor  difficulties  generally;  and 
that  the  thwarted  energies  may  find  a  moral  equivalent 
in  forms  of  self-expression  if  opportunity  is  provided  dur- 
ing work  and  leisure  hours.^  Ross  finds  that  "industrial- 
ism holds  apart  the  sexes"  and  that  consequently  the 
"sex  instincts  are  needlessly  thwarted  or  perverted."^ 
And  Lippmann's  illuminating  study  of  the  Chicago  Vice 
Commission  Report  leads  to  his  plea  to  "see  sex  as  an  in- 
stinct which  can  be  transmuted,  and  turned  into  one  of  the 
values  of  life."  What  is  needed  is  civilized  means  of 
* '  transmuting  the  sex  impulse  into  art,  into  social  endeavor, 
into  religion."  The  full  economic  bearing  is  further  sug- 
gested by  Lippmann's  broad  proposition  that,  "No  one 
can  doubt  that  to  abolish  prostitution  means  to  abolish  the 
slum  and  the  dirty  alley,  to  stop  overwork,  underpay,  the 
sweating  and  the  torturing  monotony  of  business,  to  breathe 
a  new  life  into  education,  ventilate  society  with  frankness, 
and  fill  life  with  play  and  art,  with  games,  with  passions 
which  hold  and  suffuse  the  imagination."  Psychology  re- 
veals that  the  task  of  sound  business  statesmanship  is  to 
work  out  moral  equivalents  for  the  sex  energies  of  the 
workers.  Without  such  equivalent  expressions,  the  power- 
ful sex  energies  are  almost  sure  to  play  havoc  from  time 
to  time  with  economic  harmony  and  efficiency.* 

1  Freud,  S.,  "Introduction  to  Psychoanalysis,"  pp.  8,  300. 

2  C.  H.  Parker,  "The  Casual  Laijorer,"  Chapters  II-III. 

3  Ross,  E.  A.,  "Principles  of  Sociology,"  p.  50. 
•4  See  W.  Lippmann,  "Preface  to  Politics." 


Human  Adaptation  to  Economic  Environment   59 

William  James  has  made  an  historic  contribution  to  the 
understanding  of  the  pugnacious  and  emulative  instincts  in 
his  essay  on  "The  Moral  Equivalent  of  War."  The  neces- 
sity is  not  merely  for  a  moral  equivalent  of  war  between 
nations,  but  for  a  moral  equivalent  of  the  equally  damaging 
war  between  classes  within  nations.  Economic  foresight 
comes  to  consist  more  and  more  of  devising  methods  of  find- 
ing productive  expressions  of  the  energies  which  underlie 
military  and  industrial  war.  History  teaches  the  futility  of 
attempts  to  abolish  the  instincts  and  energies  which  give 
rise  to  war,  but  psychology  teaches  the  soundness  of  efforts 
to  give  men  the  thrill  and  glory  and  hardihood  and  zest 
of  combativeness  in  the  arena  of  economics.  Rivalry  with 
one's  fellow  workers,  keen  exertion  to  win  promotion,  a 
clear  vision  of  increasing  efficiency  in  work,  a  sense  of 
pride  and  mastery — accomplishment — all  these  are  capable 
of  drawing  upon  the  instinctive  energies  that  are  potential 
for  war.  They  offer  what  Wallas  calls  the  ' '  nervous  tonic ' ' 
for  belligerency.  They  are  the  background  of  the  assertion 
by  R.  B.  Wolf,  based  upon  wide  experience  as  an  industrial 
engineer,  that  "The  present  labor  unrest  is  the  natural 
result  of  diverting  the  creative  instinct  of  the  work- 
man from  constructive  to  destructive  channels.  .  .  . 
Just  so  long  as  the  majority  of  workmen  are  using  their 
brains  merely  to  direct  their  bodies  and  are  doing  work 
which  requires  little  or  no  thought,  just  so  long  shall  we 
have  industrial  unrest." 

Lippmann  lays  down  the  significant  assumption  that 
"every  lust  is  capable  of  some  civilized  expression.  .  .  . 
Behind  evil  there  is  power.  .  .  .  Training  and  opportunity 
decide  in  the  main  how  men's  lusts  shall  emerge.  Left 
to  themselves,  or  ignorantly  tabooed,  they  break  forth  in 
some  barbaric  or  morbid  form.  Only  by  supplying  our 
passions  with  civilized  interests  can  we  escape  their  de- 
structive force. ' '  ^ 

This  principle  of  substitute  expression  of  instinct  ener- 
gies is  accepted  from  the  physiological  and  psychological 
standpoint  by  W.  B.  Cannon,  who  writes,  in  reference  to 
1  "Preface  to  Politics,"  pp.  50-51. 


60    Human  Adaptation  to  Economic  Environment 

the  instinct  to  fight,  "What  is  needed  is  not  a  suppression 
of  these  capacities  to  feel  and  act,  but  their  diversion  into 
other  channels  where  they  may  have  satisfactory  expres- 
sion." In  addition  to  the  moral  equivalents.  Cannon  finds 
physical  equivalents  for  warlike  energies  in  the  form  of 
games  and  sports.  His  conclusion  is,  "In  competitive 
sports  the  elemental  factors  are  retained — man  is  pitted 
against  man,  and  all  the  resources  of  the  body  are  sum- 
moned in  the  eager  struggle  for  victory.  And  because, 
under  such  circumstances,  the  same  physiological  altera- 
tions occur  that  occur  in  anticipation  of  mortal  combat,  the 
belligerent  emotions  and  instincts,  so  far  as  their  bodily 
manifestations  are  concerned,  are  thereby  given  complete 
satisfaction."  ^ 

Rationalization 

There  is  another  way  by  which  the  instinct  tendencies 
can  settle  the  conflict  and  deal  with  the  repressive  agencies ; 
they  may  carry  out  the  tendency  in  such  disguised  and 
camouflaged  form  that  the  repressing  agency  does  not  de- 
tect the  real  incompatibility.  In  brief,  we  go  ahead  and 
do  what  we  feel  we  want  to  do,  and  then  justify  the  deed 
with  excuses  that  seem  perfectly  plausible  to  everybody 
and  even  to  ourselves.  So  our  thinking  becomes  an  effort  to 
find  plausible  reasons  for  what  we  want  to  do  and  think 
and  feel  and  be. 

For  example,  owing  to  the  herd  instincts  and  the  general 
tendencies  of  imitation,  suggestion,  etc.,  Trotter  declares 
that  the  "belief  of  affirmations  sanctioned  by  the  herd 
is  a  normal  mechanism  of  the  human  mind,  and  goes  on 
however  much  such  affirmations  may  be  opposed  by  evi- 
dence" and  furthermore,  that  "reasons  cannot  enforce 
belief  against  herd  suggestion."  So  economic  beliefs  that 
can  be  paraded  under  the  name  of  loyalty,  or  American- 
ism, secure  the  adherence  of  masses  of  people  through 
first  exciting  instinctive  herd  emotions  and  later  attaching 
thereto  a  plausible  moral.  Thus  we  have  the  chief  labor 
leaders  arguing  against  the  chief  business  men  on  the  open 
1  "Bodily  Changes  in  Pain,  Hunger,  Fear  and  Rage,"  pp.  201.  297. 


Human  Adaptation  to  Economic  Environment    01 

or  the  closed  shop,  the  labor  chiefs  pleading  for  "Ameri- 
can freedom  for  the  working  man,"  the  business  chief 
pleading  for  "the  American  or  open  shop."  Both  are 
instinctive  emotional  appeals  first  and  rational  justifica- 
tions afterwards. 

It  is  natural  for  men  to  consider  an  unpleasant  idea 
ridiculous,  and  arguments  are  easily  marshalled  against 
an  odious  proposition.  "Society  thus  brands  what  is  un- 
pleasant as  untrue."^  New  ideas  are  apt  to  be  unpleasant 
ideas,  because  they  disrupt  habitual  modes  of  thought. 
"The  result  is,"  according  to  Robinson,  "that  most  of 
our  so-called  reasoning  consists  in  finding  arguments  for 
going  on  believing  as  we  do."  The  editor  of  a  business 
magazine  or  of  a  labor  periodical  may  stretch  and  strain 
his  logic  mercilessly  and  go  around  Robin  Hood's  barn 
many  times  before  he  finds  ample  justification  for  the 
latest  move  of  his  group,  but  he  is  always  able  to  assign 
a  reason,  even  though  to  one  not  captivated  by  the  same 
emotions,  it  may  seem  often  a  very  absurd  one.  "When  we 
"get  down  on"  a  President  of  the  country  or  the  President 
of  a  bank,  all  of  his  deeds  are  apt  to  look  black  and  false. 

It  is  not  important  that  such  beliefs  be  logical — the  im- 
portant fact  is  that  they  square  with  the  psychological 
demands  from  within.  An  interesting  observation  made  by 
Martin  in  "The  Behavior  of  Crowds"  shows  how  the  wish  of 
the  radical  leads  to  a  philosophy  of  revolution  in  which  the 
economic  order  is  seen  as  a  collection  of  forces  which  are 
steadily,  irresistibly  rolling  forward  to  the  day  when  they 
will  culminate  in  revolution, — a  philosophy  admirably 
fashioned  to  please  and  satisfy  the  wish  and  longing  un- 
derneath. In  a  multitude  of  mental  conflicts  the  will  has 
decided  before  thinking  has  even  gotten  under  way.  The 
reasoned   justifi(;ation   is  an   afterthought. 

Our  own  failure  is  rationalized  by  placing  the  blame  on 
someone  else.  So  an  inferiority,  a  weakness,  an  inefficiency 
may  be  reasoned  away  by  ascribing  the  fault  to  the  be- 
havior of  others.    As  White  states,^  ' '  The  man  who  is  f ail- 

1  Freud'a  "Tntrochiction  to  Psychoanalysis,"  p.  9. 

2  "Mental  Hygiene,"  p.  59. 


t)2    Human  Adai)tatio7i  to  Economic  Environment 

ing  in  mental  efficiency  believes  that  other  members  of 
the  office  force  are  putting  up  jobs  on  him,  annoying  him, 
interfering  with  him  in  all  sorts  of  ways  so  he  cannot 
do  his  work." 

The  foreman  who  exults  in  power  excuses  petty  tyran- 
nies over  his  workmen  on  the  ground  that  they  are  unruly, 
or  insolent,  or  need  discipline,  his  real  reason  being  his  de- 
light in  self-assertiveness.  The  bad  workman  finds  fault 
with  his  machinery,  or  his  boss  or  the  factory  system, 
his  real  trouble  being  his  own  industrial  inefficiency, 
which  he  would  be  ashamed  to  confess,  even  to  himself. 
The  engineer,  having  failed  in  getting  his  task  done  or  the 
advertising  manager,  having  failed  to  sell  the  goods,  attrib- 
utes the  failure  to  the  impossibility  of  the  task.  "It  is 
recorded  that  Lord  Kitchener,  when  a  subordinate  during 
the  South  African  "War  began  to  explain  a  failure  to  obey 
orders,  said  'Your  reasons  for  not  doing  it  are  the  best 
I  have  ever  heard;  now  go  and  do  it.'  "  The  executive 
whose  self-assertive  instincts  make  him  determined  to  ' '  run 
his  business  as  he  pleases"  surrounds  his  determination  by 
a  host  of  excellent  reasons  for  maintaining  industrial 
■autocracy.  The  profiteer,  the  labor  autocrat,  the  conserva- 
tive, the  liberal,  all  too  often  resolve  their  mental  conflict 
by  doing  what  their  instinctive  nature  wants  to  do  and  then 
finding  good  and  sufficient  reasons  for  their  wilfulness. 

Most  motives  that  are  selfish,  or  licentious,  or  unsocial, 
or  shameful,  tend  to  become  sugar-coated  with  altruis- 
tic-sounding explanations  and  righteous  justifications.  A 
man  who  foresees  depression,  and  fears  to  suffer  the  loss 
of  having  a  large  stock  of  goods  on  hand,  suddenly  cuts 
prices  somewhat  in  order  to  sell  out  in  time  and  takes 
credit  to  himself  as  being  the  great  foe  of  profiteers.  An- 
other sees  workmen's  insurance  coming  and  takes  up  a 
"safety  first"  crusade  to  save  himself  insurance  costs, 
meantime  complimenting  himself  on  his  humanitarian 
business  policies.  A  worker  who  dreads  to  lose  his  job 
welcomes  a  philosophy  of  industry  which  approves  restric- 
tion of  production.  The  conflict  of  instinct  motives  be- 
comes solved  by  doing  what  men  feel  impelled  to  do  by 


Human  Adaptation  to  Economic  Environment    63 

their  instinctive  energies  and  thereupon  contriving  plaus- 
ible reasons.  All  this  is  not  necessarily  in  the  nature  of 
hypocrisy  but  is  the  natural,  unconscious  way  of  avoiding 
psychic  revolt  and  maintaining  mental  harmony,  peace 
and  consistency. 

Revolt 

The  hereditary  endowment  of  instincts  of  many  hundreds 
of  thousands  of  economic  worlcers  is  so  defective  or  near 
defective  that  even  under  the  most  favorable  environmen- 
tal conditions,  their  adaptation  to  life's  economic  needs  is 
next  to  impossible.  It  is  estimated  that  this  class  of  defec- 
tives numbers  upwards  of  10,000,000  individuals  in  the 
United  States.  When  these  people  find  themselves  in  an 
environment  which  is  not  simple  and  easy  to  cope  with, 
but  severely  complex  and  difficult,  their  mental  machinery 
suffers  breakdoAvn.  In  addition  to  these  groups  who  are 
weakly  equipped  mentally  to  begin  with,  there  are  other 
large  groups  who,  though  normally  set  up  by  nature,  never- 
theless suffer  nervous  maladjustment  and  mental  disorder 
when  they  are  obliged  to  cope  with  the  harsher  sections  of 
the  economic  environment.  These  disrupting  features  of 
the  economic  order,  by  thwarting  certain  instinctive  en- 
ergies and  suppressing  normal  cravings,  are  direct  causes 
of  widespread  industrial  revolt,  mania,  psychosis,  sulki- 
ness,  viciousness,  and  neurosis  generally.  Such  environ- 
mental factors  appear  under  such  terms  as  ''unemploy- 
ment," "bad  housing,"  "immigrant  c/)ngestion, "  "hire 
and  fire,"  "automaton,"  "poverty,"  "foreman's  ty- 
ranny," "unsanitary  factory  conditions,"  "industrial  ac- 
cidents," "industrial  autocracy,"  "overwork,"  "monot- 
ony," "fatigue,"  "bankruptcy,"  "lockouts  and  strikes." 

To  understand  the  origin  of  such  psychic  failures,  the 
concept  of  the  unconscious  comes  into  play.  What  we  are 
aware  of  at  any  one  moment,  or  in  any  one  day  is  at 
most  only  a  very  small  portion  of  all  the  experiences  packed 
away  in  our  mental  storehouse.  Below  the  level  of  the 
conscious  is  the  unconscious.  Part  of  i  is  past  recall;  part 
comes  bafek  by  an  effort  of  recollection.    Here  exist  dynamic 


64  Human  Adaptation  to  Economic  Environment 

energies  of  the  instincts,  craving  outlets  which  environ- 
ment denies.  This  conflict  of  nervous  energies  gives  rise 
to  inner  states  of  mental  and  organic  tension.  Wallas  ex- 
plains that  "If  we  balk  any  one  of  our  main  dispositions, 
Curiosity,  Property,  Trial  and  Error,  Sex,  and  the  rest,  we 
produce  in  ourselves  a  state  of  nervous  strain."  ^ 

Sciences  of  psychoanalysis,  psychiatry,  psycopathology 
and  psychotherapy  have  developed  to  diagnose  and  remedy 
the  states  of  conflict  and  strain.  Although  still  in  their 
initial  stages  and  subject  to  much  controversy  these  studies 
of  mental  disorders  contain  some  fundamental,  and  gen- 
erally accepted  assumptions  which  are  highly  serviceable  in 
any  attempt  at  understanding  economic  behavior.  The 
genius  of  Freud  gave  these  studies  their  great  impetus. 
However,  Freud's  extreme  emphasis  upon  the  sex  energies, 
suppressed  as  they  are  by  the  taboos  and  revulsions  of  social 
standards,  and  his  attributing  of  virtually  all  neurotic  dis- 
ease to  this  sex  repression  is  generally  conceded  to  be  too 
narrow  an  application  of  fundamental  human  processes. 
Jung  extended  the  doctrines  to  the  ego-energies,  the  life 
impulses  as  well  as  to  sex,  and  asserted  that  nervous  de- 
rangment  ensued  not  merely  from  sex  repression,  but  from 
denial  of  the  "energy  of  life"  which  manifests  itself  in 
"growth,  development,  hunger,  and  all  the  human  activi- 
ties and  interests."^  Rivers  relates  the  successful  results 
in  treating  breakdowns  in  military  life  among  British  sol- 
diers, by  appljnng  the  essential  Freudian  methods  to  the 
so-called  "danger  instincts,"  i.e.,  flight,  pugnacity,  etc.^ 
Certain  American  students  have  found  that  any  of  the 
primary  emotions — love,  hate,  hunger,  shame,  sorrow,  fear, 
disgust — may  cause  a  neurosis  under  appropriate  condi- 
tions of  repression.* 

Trotter  has  pointed  out  in  comprehensive  terms  that 
the  conception  of  mental  conflict  is  the  central  feature  of 
this  whole  system  of  analysis,  and  he  insists  that  "Of  its 

1  "Tlie  Great  Society,"  p.  65. 

2  Jung,  "Psychology  of  the  Unconscious,"  p.  xxvi. 

3  W.  H.  Eivcr's  "Instinct  and  the  Unconscious." 

4  See  E.  J.  Kempt".  "Psychopathology." 


Human  Adaptation  to  Economic  Environment    65 

importance  and  validity  there  can  be  no  doubt."  ^  He  finds 
that  the  repressive  factor  in  this  conflict  has  the  impulsive 
energy  which  comes  from  the  instincts  of  the  herd,  and 
that  the  whole  social  and  economic  environment,  by  set- 
ting up  taboos  and  standards  and  laws  which  the  social 
instincts  accept  and  enforce,  creates  the  conflict  that  leads 
on  to  the  mental  derangements  which  are  so  widespread. 
Repression,  conflict,  derangement  are  the  cause  to  eifect 
links  in  the  chain. 

A  condensed  application  of  these  basic  principles  is  at- 
tempted by  Parker  in  the  following  form:  "The  monotony, 
indignity,  dirt,  and  sexual  apologies  of,  for  instance,  the 
unskilled  worker's  life  bring  their  definite  fixations,  their 
definite  irrational  inferiority  obsessions.  The  balked  la- 
borer here  follows  one  of  the  two  described  lines  of  conduct : 

First,  either  weakens,  becomes  inefficient,  drifts  away, 
loses  interest  in  the  quality  of  his  work,  drinks,  deserts 
his  family,  or. 

Secondly,  he  indulges  in  a  true  type  inferiority  com- 
pensation and  in  order  to  dignify  himself,  to  eliminate  for 
himself  his  inferiority  in  his  own  eyes,  he  strikes  or  brings 
on  a  strike,  he  commits  violence  or  he  stays  on  the  job  and 
injures  machinery,  or  mutilates  the  materials;  he  is  fit 
food  for  dynamite  conspiracies.  He  is  ready  to  make 
sabotage  a  part  of  his  regular  habit  scheme.  ...  If  one 
leaves  the  strata  of  unskilled  labor  and  investigates  the 
higher  economic  classes  he  finds  parallel  conditions."^ 

A  sweeping  survey  of  the  many  business  geniuses  suf- 
fering from  neurasthenia,  of  the  frenzied  and  distracted 
efforts  of  executives  to  adjust  their  mental  powers  to  kalei- 
doscopic changes  in  business  affairs,  of  the  tortuous 
struggles  of  labor  leaders  to  maintain  themselves  in  power, 
and  of  the  rebellious,  sullen  attitudes  of  irascible  laborers, 
indicates  -the  profoundly  significant  economic  consequences 
of  repression,  conflict,  and  derangement. 

No  small  portion  of  this  revolt  psychosis  arises  from  the 
all  too  abundant  stimulus  of  the  danger  and  anxiety  in- 

1  "Instinct  of  the  Herd  in  Peace  and  War,"  p.  79. 

2  "Casual  Laborer,"  p.  49. 


66   Human  Adaptation  to  Economic  Environment 

stinets  and  emotions  in  the  economic  struggle.  The  worries 
and  fears  of  the  laborer  are  matched  by  the  worries  and 
fears  of  everybody  else  in  the  economic  groups.  If  it  is 
not  the  fear  of  unemployment,  or  underpayment,  or  acci- 
dent, or  discrimination,  or  petty  foreman's  tyranny,  it  is 
the  fear  of  bankruptcy,  failure,  loss  of  position  or  of 
promotion,  rivalry,  competition.  In  the  economic  struggle 
for  survival,  anxiety  states  and  distress  forebodings  hem 
in  the  participants.  Cannon  has  proved  by  extensive  labo- 
ratory experiments  that  where  the  normal  instinctive  life 
is  held  in  subjection  by  these  fears,  'Hhe  emotional  ac- 
complishments— such  as  the  satisfaction  of  food  and  of 
sexual  affection,  the  feeling  of  self-pride,  and  the  tender 
love  of  a  parent — are  whirled  suddenly  into  anger."  All 
of  the  energy  that  would  normally  flow  into  thought, 
creativeness,  self-expression,  public-spiritedness,  and  their 
like  is  arrested  and  redirected  by  an  overlord  in  human 
nature, — by  the  danger  and  distress  mechanisms.  This 
recentering  of  energy  involves  far-reaching  bodily  changes, 
such  as  interference  with  healthy  digestive  processes,  the 
shifting  of  blood  from  the  abdominal  organs  to  the  lungs, 
the  heart,  the  central  nervous  system,  the  increased  force 
of  heart  action,  the  mobilization  of  blood  sugar,  the  secre- 
tion of  special  glands  such  as  the  adrenal.  The  normal 
self-control  and  rational  influence  over  conduct  becomes 
minimized,  and  militant  behavior  comes  to  the  front. 
"Where  the  anxiety  states  are  not  so  violent,  but  none  the 
less  real,  the  beha^aor  reaction  is  likely  to  be  seen  in  inertia, 
discouragement,  depression,  loss  of  interest,  malice,  surli- 
ness, or  alcoholic  indulgence. 

Cannon's  work  points  in  the  same  direction  as  that  of 
Crile.  Crile  writes,  "It  is  obvious,  therefore,  that  the 
absence  of  worry  and  fear  may  aid  in  stopping  the  body 
wide  activations  which  lead  to  an  organic  breakdown.  .  .  . 
The  effect  of  fear,  grief,  worry  and  jealousy  on  the  physical 
body  is  seen  in  the  changes  in  the  cells  of  the  brain,  the 
adrenals  and  the  liver,  and  in  the  numerous  resultant  dis- 
eases and  disabilities.  Against  man's  inhumanity  to  man, 
religions  and  philosophies  have  been  eVolved,  each  of  which 


Human  Adaptation  to  Economic  Environment    67 

aids  in  proportion  to  its  power  to  substitute  altruism  for 
selfishness,  to  substitute  faith  for  fear.  .  .  .  The  mere 
knowledge,  the  mere  conviction,  that  excessive  anger,  work, 
jealousy,  envy,  worry  or  grief  cause  physical  damage  as 
serious  as  that  produced  by  infections  or  crushing  blows 
will  constitute  a  powerful  protection  to  man. ' '  ^ 

Such  is  the  conclusion  drawn  from  elaborate  biological, 
physiological,  and  psychological  investigation.  It  points  in 
the  direction  of  the  studies  of  the  more  careful  of  the  psy- 
choanalysts, namely,  the  repressions  of  the  economic  en- 
vironment with  its  herd  taboos  and  fears  and  compulsions, 
the  consequent  conflicts  of  great  human  impulses,  both  con- 
scious and  unconscious  in  their  workings,  and  the  final 
inner  derangements,  manias,  irascibilities,  neuroses,  and 
aberrations.  In  a  word,  psychic  revolt  and  mental  disease 
are  the  finished  product  of  man's  futile  attempts  to  adapt 
his  human  nature  to  certain  repressive  features  of  his 
economic  environment. 

Two  ways  of  escape  from  the  difficulty  present  them- 
selves :  change  the  economic  environment,  or  educate  and 
change  human  nature.  Any  particular  economic  problem 
has  to  be  solved  on  its  individual  peculiarities,  but  such  a 
solution  will  be  some  varying  combination  of  these  two 
lines  of  procedure.  Keller  has  warned  that  "We  get  the 
idea  that  man  does  not  adapt  to  environment,  but  adapts 
the  environment  to  himself  and  his  needs.  But  we  learn 
no  power  over  nature  till  we  learn  natural  laws,  to  con- 
form and  adapt  ourselves  to  them,  .  .  .  Our  lordship  over 
nature  consists  in  the  adroitness  with  which  we  learn  to 
conform. "2  The  ability  to  discipline  one's  instincts  and 
emotions,  to  eliminate  the  injurious  tendencies,  to  subli- 
mate the  potentially  dangerous  energies  of  the  mind,  and 
to  avert  the  calamity  of  psychic  revolt  is  an  indication  of 
the  efficiency  and  success  of  men  in  their  economic  pur- 
suits. But  many  features  of  the  environment  make  smooth 
adaptation  next  to  impossible,  and  even  when  possible, 
humanly  damaging.     Such  dark  and  pernicious  elements 

1  "Man,  an  Adaptive  Mechanism,"  pp.  12,  377. 

2  A.  G.  Keller,  "Societal  Evolution,"  p.  22. 


68    Human  Adaptation  to  Economic  Environment 

need  eradication,  the  environment  itself  needs  alteration. 
Both  processes  enter  into  any  rational  and  healthful  ad- 
justment between  men  and  their  work. 

The  remedial  treatment  of  human  nature  is  a  proc- 
ess of  revelation.  Men  need  to  be  shown  wherein  their 
repressions  and  maladjustments  have  gotten  the  better  of 
them.  The  nature  of  the  conflict,  the  repressive  force  and 
the  inner  craving,  the  meaning  of  a  healthy  adaptation, — 
all  these  need  to  be  revealed  to  those  suffering  from  the 
psychic  distresses  of  the  economic  order.  It  is  this  pro- 
cedure which  Holt  summarizes  in  his  book,  ' '  The  Freudian 
"Wish,"  in  his  plea  for  "a  more  complete  discrimination  of 
the  elements  in  the  situation  to  be  reacted  upon,  to  resolve 
every  situation  rather  than  do  violence  to  it  by  a  summary 
Yes  or  No."  1 

The  human  maladjustments  are  so  frequent  and  so 
damaging  that  economic  activity  has  created  a  press- 
ing need  for  a  science  of  mental  hygiene  in  industry. 
Industry  abounds  with  mental  diseases,  nervous  derange- 
ments, psychic  revolts.  Misfits  and  misfortunes  harass  the 
productive  processes.  Psychological  smash-up  occurs  at 
every  hand.  False  ideas  launch  men  on  fatal  ambitions, 
and  abnormal  habits  and  defective  inborn  traits  encumber 
their  life  experiences  with  distress  and  tragedy.  A  science 
of  mental  hygiene  would  offer  a  hope  of  understanding 
such  mental  liabilities  as  are  suggested  in  the  following  list 
mentioned  by  Dr.  E,  E,  Southard,  "queer  guys,  eccen- 
trics, disturbers,  queruleous  persons,  unreliable  and  un- 
stable fellows,  misfits,  the  irritable,  the  sullen,  socially  dis- 
gruntled, unsociable,  negative,  conscientious,  litigious, 
bear-a-grudge,  peculiar,  glad-hand,  gossipy,  roving,  rest- 
less, malicious,  lying,  swindling,  sex  pervert,  false  accusa- 
tor,  abnormal  suggestibility,  and  mental  twist  types, ' '  ^ 
Southard's  opinion  appears  well  founded  when  he  urges 
that  mental  hygiene  is  indispensable  if  there  is  ever  to  be 
an  adequate  analysis  and  effective  control  of  these  patholog- 
ical or  near-pathological  groups. 

1  Holt,  "The  Freudian  Wish,"  pp.  134-135. 

2  Industrial  Management,  Vol.  59,  pp,  100-106, 


Human  Adaptation  to  Economic  Environment    69 

The  conception  of  economics  as  a  human  science  does 
not  militate  against  a  careful  study  of  the  laws  and  prin- 
ciples which  traditionally  enter  into  economic  thinking.  It 
is  indispensable  to  maintain  conceptions  of  land,  labor  and 
capital  as  more  or  less  abstract  factors  in  production.  It 
is  indispensable  to  think  of  the  law  of  demand  and  supply, 
the  principles  of  exchange,  the  processes  of  distribution,  the 
theories  of  value  and  price,  and  the  statistics  of  output  and 
trade.  Economics  is  indissolubly  related  to  all  these  gen- 
eralizations and  interpretations.  But  economics  which  ends 
there,  ends  too  soon.  All  this  is  essential  but  it  is  not  enough. 
Economics  is  equally  a  science  of  the  imponderables  of 
human  nature, — of  the  motives,  emotions,  thoughts  and 
satisfactions  of  men  engaged  in  earning  and  spending  an 
income.  The  ambitions  or  lack  of  ambitions  of  the  men 
who  work  at  machines,  the  degree  of  dullness  or  imagina- 
tion in  the  mind  of  common  labor,  the  extent  to  which  the 
distribution  of  comfort  and  well-being  coincides  with  the 
distribution  of  income,  the  human  qualities  which  distin- 
guish what  some  term  the  successful  from  the  unsuccess- 
ful classes, — these  and  the  vast  outlay  of  invisible  human 
realities  to  which  they  may  be  expanded  are  an  integral 
part  of  any  completed  economic  thought.  Laws,  principles, 
statistics  all  require  the  vitalizing  outlook  of  the  psy- 
chology of  men. 

Which  is  the  more  important?  As  well  might  the  ques- 
tion arise.  Which  is  greater,  the  life  of  the  plant,  or  the  sun- 
shine and  the  soil?  There  is  no  rank  of  precedence, — they 
are  a  unit.  Man  is  at  the  center  of  economics, — a  human 
factor, — and  it  is  for  him,  and  by  him,  and  through  him 
that  all  economic  control  over  nature  proceeds.  Economics 
is  not  mainly  the  science  of  things ;  it  is  the  science  of  life. 
It  concerns  the  realization  of  human  energies,  and  at  the 
basis  of  all  economic  behavior  lies  instinctive  nature. 

The  chapters  thus  far  have  attempted  to  explain  in  very 
condensed  form  the  chief  psychological  conceptions  that 
have  value  in  such  an  analysis  of  economics.  The  remain- 
der of  the  book  is  an  application  of  them  to  the  more  out- 
standing economic  processes  of  the  present  day. 


70   Human  Adaptation  to  Economic  Environment 


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Swift,  C.  E.:  Mind  in  the  Making 

HOBHOUSE,  L.  T.:   Mind  in  Evolution 

RiBOT,  T. :  Psychology  of  the  Emotions 

Bernard:  Misuse  of  Instinct,  Psychological  Review,  Vol.  28,  p. 
26 

Jastrow,  Joseph:  Psychology  of  Conviction 

Jung:   Psychology  of  the  Unconscious 

Metchnikoff:  The  Nature  of  Man 

Rivers:   Instinct  and  the  Unconscious 

White:  Principles  of  Mental  Hygiene 

Tridon,  a.:  Psycho- Analysis 

CoOLEY,  C.  H.:  Social  Organization;  Social  Process 

Elwood,  C.  a.:   Sociology  in  its  Psychological  Aspects 

Hollingworth :  Vocational  Psychology;  The  Psychology  of 
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Hollingworth  and  Poffenberger  :  Applied  Psychology 

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Yerkes  and  others:   Point  Scale  for  Measuring  Mental  Ability 

Yoakum  and  Yerkes:  Army  Mental  Tests 

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SiDis,  B.:  The  Psychology  of  Suggestion 

Titchener:   A  Beginner's  Psychology 

Terman,  L.  W.  :  Measurement  of  Intelligence 

Swift:  Psychology  and  the  Day's  Work 

Drever:  Instinct  in  Man 

Ward:  Psychological  Principles 

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Addams,  Jane:  Democracy  and  Social  Ethics 

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Kempf,  E.  J.:  Psychopathology 

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Cory:  The  Intellectuals  and  the  Wage  Workers 

Hocking:  Hmnan  Nature  and  its  Remaking 


Human  Adaptation  to  Economic  Envij'onment    71 

Patrick,  G.  T.  W.:  The  Psycholo^  of  Social  Reconstruction 

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Political  Economy,  Vol.  26,  pp.  1,  136 

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Journal  c  .  Economics :  Vol.  29,  pp.  1-4 


PART  II 

ECONOMIC  INSTITUTIONS  AND 
FUNCTIONS 


CHAPTER  V 

THE  MECHANICAL  AND  SCIENTIFIC  BASIS  OF  ECONOMICS 

Machines  and  science  are  the  means  by  which  men  deal 
with  wealth.  The  processes  of  manufacture,  the  scale  of 
production,  the  method  of  transportation,  the  demands  for 
credit,  all  spring  from  the  state  of  the  mechanical  and 
physical  sciences.  Advances  in  these  sciences  determine 
the  amount  of  wealth  available  for  use,  the  forms  which 
it  takes,  the  happiness  of  men  in  fitting  w^ealth  for  con- 
sumption, in  fact,  all  that  goes  into  the  make-up  of  economic 
life. 

Even  the  simplest  processes  of  machine  operation  are 
so  much  a  matter  of  scientific  calculation  that  the  work- 
er's common  sense  cannot  be  trusted  as  a  guide  to  effi- 
cient or  reasonably  intelligent  operation.  Specialists  and 
experts,  by  long  study,  experiment,  and  statistical  com- 
putation, are  needed  to  determine  the  right  and  efiFeetive 
way  of  making  each  minute  maneuver.  But  each  single 
maneuver  has  meaning  and  use  only  in  so  far  as  it  is 
properly  related  and  co-ordinated  with  a  hundred  or  a  thou- 
sand other  maneuvers  by  hundreds  or  thousands  of  other 
workers,  in  many  separate  and  scattered  plants,  often 
located  in  several  countries  thousands  of  miles  apart.  This 
vast  ramification  and  interdependence  requires  the  most 
elaborate  form  of  scientific   calculation,   observation  and 

72 


Scientific  Basis  of  Econovucs  73 

forecast,  for  if  one  link  in  the  process  is  cut,  the  entire 
chain  is  broken  and  the  economic  process  is  at  a  stand- 
still. Whether  a  man  shall  produce  more  or  less,  or  whether 
he  shall  produce  at  all,  hangs  upon  an  infinitely  complicated 
network  of  factors,  machines,  processes,  and  materials.  A 
failure  to  make  the  right  adjustment  at  any  part  of  the 
process  entails  waste,  idleness,  anxiety,  distress.^ 

The  paramount  significance  of  the  mechanical  equip- 
ment is  that  it  serves  to  increase  the  output  from  a  given 
amount  of  labor.  Owing  to  the  use  of  machinery,  the  aver- 
age worker  produces  today  more  than  two  and  one-half 
times  as  much  as  in  1850.^  The  worker  to-day  has  produc- 
tive equipment  four  times  as  valuable  per  capita  as  that 
of  his  father  working  back  in  1850.  This  increased  invest- 
ment in  productive  capital,  by  giving  the  worker  a  superior 
mechanical  and  scientific  equipment,  has  nearly  trebled  his 
productive  capacity.  As  King  summarizes  it,  "Evidently 
the  popular  impression  is  true  that,  as  far  as  dwelling, 
vehicles,  clothing,  etc.,  are  concerned,  we  live  in  a  state  of 
luxury  that  our  fathers  knew  not  of. ' ' 

Of  course  not  all  of  this  increased  production  is  avail- 
able for  consumption.  A  great  part  of  production  is  ma- 
chinery and  materials  to  be  used  for  further  production. 
By  no  means  is  all  of  the  output  in  the  nature  of  clothing 
or  food  or  furniture  or  drugs.  In  large  part  it  is  new 
buildings,  new  transportation  facilities,  new  machinery, 
and  new  equipment  for  carrying  on  all  the  processes  of 
economic  life.^  Since  the  depression  of  1893-1896,  we  have 
invested  as  much  capital  in  manufacturing,  railroads, 
public  utilities  and  mines  as  we  had  invested  in  those  in- 
dustries in  all  our  previous  history.*  Some  conception  of 
the  magnitude  of  this  class  of  goods  will  be  gained  from 
the  estimate  that  in  1913,  the  new  productive  capital  turned 
out  was  about  $6,500,000,000,  in  1918,  $22,000,000,000,  and 
in  1919,  $15,000,000,000.    Goods  to  these  amounts  were  our 

1  See  T.  Veblen,  "Theory  of  Business  Enterprise,"  Chapter  I. 

2  King,  "Wealth  and  Income  of  People  of  United  States,"  p.  43. 

3  Friday,  "Profits,  Wages,  and  Prices,"  p.  78. 
*  Friday,  idem,  p.  91. 


74  Scientific  Bads  of  Economics 

national  excess  of  production  above  consumption.  The 
excess  each  year  over  consumption  is  in  turn  devoted  to 
more  production,  and  to  that  extent  serves  to  make  possible 
an  increase  in  the  productive  capacity  of  the  worker. 

On  the  average  between  one-seventh  and  one-fifth  of 
the  total  product  goes  to  the  making  of  these  non-consum- 
able goods.  Any  notion  of  productive  efficiency  due  to 
mechanical  and  material  equipment  must  take  this  non- 
consumable  portion  of  the  full  national  product  into  ac- 
count. With  due  allowance  for  this  factor,  it  is  estimated 
that  the  net  efficiency  of  the  laborer  in  making  consum- 
able goods  has  been  at  least  doubled.  Progress  in  the 
future  depends  upon  improvements  in  this  mechanical,  ma- 
terial and  scientific  factor.  Only  by  this  means  is  it  pos- 
sible substantially  to  increase  the  output  from  a  given 
amount  of  labor,  and  to  increase  to  the  maximum  the  avail- 
able wealth  for  human  consumption. 

Power 

Virtually  all  economic  endeavor  nowadays  involves  in 
some  way  the  use  of  natural  power.  Non-human  power 
turns  the  wheels  of  the  economic  world.  The  history  of 
human  progress  is  the  story  of  the  development  of  power 
and  its  application  to  man's  use.  Only  a  half  century 
ago,  the  total  horse-power  used  to  drive  manufacturing 
machinery  was  only  slightly  above  two  million.  In  1914 
it  was  over  twenty-two  million.  Of  this  vast  amount  of 
harnessed  power,  about  70  per  cent,  is  steam  power, 
about  3  per  cent,  water  power,  about  4.5  per  cent,  power 
from  the  internal  combustion  engine,  and  about  20  per 
cent,  electric  power.^  Obviously,  the  great  bulk  of  power 
in  manufacturing  is  still  derived  from  the  steam  engine, 
with  electric  power  second  in  importance.  Since  1904, 
the  machine  power  used  in  this  country  by  the  average 
industrial  worker  has  increased  from  two  and  one-half 
horse-power  to  more  than  three  and  one-half  horse-power. 
The  effect  is  apparent,  for  example,  in  the  coal  mining 
industry.  Owing  in  large  part  to  his  greater  use  of  mining 
1  "Abstract  of  Census  of  Manufactures,"  1914,  p.  492. 


Scientific  Basis  of  Economics  75 

machinery,  the  American  miner  digs  out  two  to  three  times 
as  much  coal  as  the  miner  in  English  fields.^  Steam,  our 
main  form  of  power,  has  been  in  turn  dependent  upon 
supplies  of  cheap  coal  and  "we  are  nationally  what  we 
are  to-day  because  always  we  could  get  plenty  of  cheap 
coal."  2 

About  two-thirds  of  all  coal  mined  is  used  for  generation 
of  power.  And  so  abundant  have  been  our  coal  supplies 
that  the  most  profligate  waste  has  prevailed  in  its  utiliza- 
tion. On  the  average  only  6  to  15  per  cent,  of  the  fuel 
energy  is  actually  realized  in  power.  The  amount  of  wast- 
age is  staggering  and  an  awakening  to  the  need  of  conser- 
vation is  one  of  the  most  pressing  economic  needs  of  the 
time. 

Scientists  are  of  the  opinion  that  if  the  recent  past  has 
been  the  age  of  coal  and  steam,  the  future  will  be  an  age 
of  electricity.  Already  the  hydro-electric  power  in  use  is 
equivalent  to  the  energy  of  40,000,000  tons  of  coal.  And 
each  year  the  electric  power  created  directly  by  burning 
coal  consumes  30,000,000  tons  of  that  fuel.  The  most 
abundant  future  source  of  electric  power  is  water  power. 
This  potential  energy  is  at  hand  for  the  harnessing.  "It 
is  estimated  that  the  water  power  readily  available  in  the 
U.  S.,  if  converted  into  electric  energy,  is  more  than  capable 
of  turning  every  industrial  wheel  and  illuminating  every 
street  and  building  throughout  the  Republic."^  Electric 
power  has  already  been  utilized  in  hoisting  machines, 
cranes,  conveyors  and  trucks,  in  transportation  by  railroad, 
surface  cars,  and  subways,  in  mining  pumps,  ventilators, 
crushers,  etc.,  in  refining  steel  and  iron,  welding  and  cut- 
ting metals,  in  textile,  flour  and  paper  mills,  and  factories 
of  almost  every  variety.  It  is  displacing  coal  because  it  is 
cheaper,  cleaner,  less  bulky,  more  easily  transported,  and 
more  easily  handled.  In  manufacturing  lines,  it  is  for  the 
most  part  utilized  through  the  individual  motor  attached 

1  "Report  of  United  States  Bureau  of  Mines,"  1920,  "Monthly 
Labor  Bulletin,"  Vol.  XI,  pp.  118-130. 

2  S.  Crowther,  WorUrs  Work,  December,  1020,  p.  173. 

3  W.  N.  Polakov,  "Industrial  Management,"  September,  1920,  p. 
234. 


76  Scientific  Basis  of  Economics 

to  the  individual  machine.  Congress  in  1920  passed  legis- 
lation which  makes  it  possible  for  private  corporations  to 
secure  federal  grants  for  the  conversion  of  water  power 
into  electrical  energy.  This  law  makes  possible  the  utiliza- 
tion of  the  vast  potential  electric  resources  of  the  country. 

The  use  of  electric  power  releases  coal  for  fuel  and  by- 
products. The  fuel  gain  is  important  from  the  stand- 
point of  conservation;  the  by-products  gain  is  important 
for  industrial  processes  and  for  consumption  purposes. 
More  than  one  thousand  coal  by-products  are  in  use.  Il- 
luminating gas,  ammonium  sulphate,  benzol,  coal  tar,  dyes, 
photograph  developers,  flavors,  perfumes,  tanning  mate- 
rials, medicinals,  explosives,  are  only  a  few  of  these  by-pro- 
ducts. They  are  indispensable  in  a  large  number  of  the 
most  important  industries  of  the  country.  To  use  the 
words  of  a  power  and  fuel  engineer,  "One  thing  is  clear, 
in  the  economic  conditions  now  arising,  the  principle  of 
electricity  as  a  commodity,  the  principle  of  common  public 
carrier  applied  to  the  transmission  of  power,  and  the  prin- 
ciple of  multiple  production  for  the  utilization  of  sources 
of  energy  will  be  the  most  important,  if  not  the  basic,  eco- 
nomic force  in  the  life  of  the  people."  ^ 

The  internal  combustion  engine,  by  utilizing  gasoline  as 
a  source  of  energy,  has  had  far-reaching  effects  upon  the 
tides  of  business  enterprise.  If  it  had  done  nothing  more 
than  make  possible  the  automobile,  its  accomplishment 
would  have  stood  as  a  fundamental  contribution  to 
economic  life  in  modern  times.  In  terms  of  capital  in- 
vested, of  workers  employed,  of  profits  and  wages  paid,  and 
of  volume  of  product,  the  automobile  industry  has  become 
one  of  the  major  industries  of  the  country.  It  has  set  men 
scouring  the  world  for  new  sources  of  petroleum,  has  cov- 
ered the  country  with  a  network  of  good  roads,  has  estab- 
lished a  demand  for  the  basic  raw  materials,  and  has 
drained  the  credit  supply  in  financial  centers.  The  inven- 
tion of  the  Diesel  engine,  based  upon  the  internal  combus- 
tion of  oil,  has  practically  revolutionized  the  methods  of 

1 W.  N.  Polakov,  "Industrial  Management,"  September,  1920,  p. 
239. 


Scientific  Bam  of  Economics  77 

water  transportation,  because  of  the  advantages  of  oil  over 
coal  as  fuel  for  shipping  purposes. 

In  its  various  forms,  natural  power  has  been  man's  con- 
stant and  indispensable  aid  in  developing  resources,  pro- 
ducing wealth,  and  making  possible  the  intricate  economic 
structure  of  modern  times. 

Machinery 

Power  combines  with  machinery  to  give  the  economic 
organization  its  technical  character.  Most  men  who  work, 
work  at  a  machine.  It  may  be  a  machine  to  generate  power, 
or  a  machine  to  lift  material,  or  a  machine  to  fashion  a 
finished  product,  or  a  machine  to  make  another  machine, 
or  a  machine  to  transport  men  or  material  or  machines  a 
distance  of  ten  feet  or  ten  thousand  miles.  From  start  to 
finish  the  economic  process  rests  upon  the  machine  tech- 
nique. 

The  outstanding  quality  of  the  machine  is  that  it  enables 
the  laborer,  by  the  use  of  power,  to  multiply  his  produc- 
tive efficiency.  In  this  respect  the  machine  is  a  labor  saver. 
One  man  with  a  machine  and  power  is  equal  as  a  producer 
to  from  a  few  to  a  small  army  of  men  working  with  bare 
hands  or  with  plain  tools. 

The  greatest  increase  of  efficiency  is  attained  through  the 
principle  of  automatic  machinery.  An  excellent  example 
is  the  weaving  loom.  Years  ago  one  woman  tended  one 
or  two  slowly  moving  looms.  Now  one  woman  may  tend 
any^vhere  from  12  to  36  looms  at  the  same  time,  with  the 
result  that  her  record  of  production  for  the  day  is  increased 
75  times  or  even  more.  One  girl  in  charge  of  1000  spindles 
spins  from  10,000  to  12,000  times  the  length  of  cotton  yarn 
her  grandmother  could  turn  out  from  her  spinning  wheel. 
In  one  type  of  mill,  the  machine  makes  82,000  yards  per 
hour  as  against  75  yards  as  the  record  of  the  old  spinning 
wheel.  In  the  needle  trades,  a  girl  operator  sits  at  a  power 
sewing  machine  carrying  12  needles  instead  of  one,  setting 
almost  4000  stitches  a  minute.  ^  A  milling  machine  en- 
ables an  operator  to  drill  several  holes  at  one  stroke  of  a 
iGoldmark,  "Fatigue  and  Efficiency,"  pp.  10,  57. 


78  Scientific  Basis  of  Economics 

lever;  other  machines  cut  several  chunks  from  the  metal 
plate  at  one  fall  of  the  multiple  blades.  The  automatic 
machine  in  its  most  perfected  forms  increases  the  produc- 
tive power  of  the  operator  on  the  average  from  75  to 
100  times.i 

During  the  last  fifteen  or  twenty  years,  this  principle 
of  automatic  machinery  has  been  applied  in  some  degree 
to  practically  all  of  the  important  production  processes. 
The  automatic  principle  is  the  transfer  of  human  skill  and 
intelligence  from  the  man  to  the  machine.  Steel  fingers, 
wheels,  levers  and  releases  perform  the  motions  of  crafts- 
manship,— the  duty  of  the  laborer  being  reduced  to  the 
minimum  of  simplicity  and  taking  such  forms  in  the  high- 
est types  of  machinery,  as  merely  feeding  the  raw  material 
into  the  mouth  of  the  machine  and  taking  the  finished 
product  away  from  the  outlet.^  Typical  of  these  automatic 
devices  are  molding,  screw  and  grinding  machines,  turret 
lathes,  and  pneumatic  hammers. 

A  recent  investigator  has  found  that  as  a  consequence 
of  the  rapid  development  of  automobile  manufacturing, 
"in  approximately  the  decade  1904  to  1914,  the  automatic 
tool  developed  into  a  production  power  of  the  highest  im- 
portance. In  the  making  of  motor  cars  it  became  and  has 
remained  indispensable.  Nor  is  its  principle  to-day  less 
indispensable  in  the  making  of  thousands  of  other  articles 
of  common  necessity  and  use."^  Most  package  goods, 
bottled  goods,  and  canned  goods  rely  upon  automatic  proc- 
esses. The  president  of  a  large  chain  of  retail  stores,  doing 
business  in  all  these  lines,  and  both  manufacturing  and 
selling  5000  different  kinds  of  articles,  depends  upon 
"standardization,  in  which  lies  the  future  of  large  volume 
business.  .  .  .  The  way  to  manufacture  most  cheaply  is  to 
establish  a  separate  department  for  each  article  and  to 
put  it  through  in  continuous  repetitive  process  with  a  mini- 
mum of  human  handling. "  *  In  other  words,  the  secret  of 
such  manufacturing  is  the  automatic  machine. 

^  8cie7itific  American  Supplement,  85:278. 

2  E.  F.  Llovd,  Journal  of  Political  Economy,  27:457, 

3  Ihid. 

*  System,  Vol.  39.  p.  355. 


Scientific  Ba^is  of  Economics  79 

This  automatic  process  necessitates  breaking  up  the  man- 
ufacturing of  an  article  into  a  score,  or  into  hundreds, 
of  minute,  separate  stages.  Each  stage  requires  a  distinct 
sort  of  automatic  machine  treatment.  The  treatment  of  each 
stage  is  standardized  and  in  this  form  can  be  repeated  mil- 
lions of  times  without  variation.  For  example  in  the  can- 
ning process  the  cans  are  filled  automatically  by  one 
machine.  An  automatic  capper  hermetically  seals  the  cans. 
The  cans  are  carried  from  filler  to  capper  by  an  automatic 
conveyor.  ' '  The  capping  girl  sits  close  to  the  red  hot  seal- 
ing irons,  dropping  a  cap  on  each  can  as  it  is  carried  swiftly 
by."^  "Without  touch  or  aid  of  human  hand,  an  auto- 
matic machine  produces  complete  one-dram  bottles  at  the 
rate  of  165  per  minute."^  Of  the  30  operations  required  in 
the  manufacture  of  farm  machines,  one  operation  requires 
a  man  to  feed  sheets  of  metal  into  a  machine  which  cuts 
them  into  a  particular  form  at  the  rate  of  20,000  per  day."^ 
The  automatic  switchboard  is  fast  eliminating  the  tele- 
phone "central."  Automatic  machinery  has  displaced 
human  effort  in  many  parts  of  office  practice, — in  typing, 
sorting,  scaling,  classifying,  filing,  addressing,  computing 
figures  and  keeping  records.  The  Webb  press  for  news- 
paper printing  turns  huge  cylinders  of  paper  into  finished 
news  sheets  at  the  rate  of  288,000  eight-page  papers  per 
hour.  Ten  operatives  are  required  to  handle  the  gigantic 
contrivance,  but  the  increase  of  production  per  worker  over 
that  of  the  operator  of  Benjamin  Franklin's  printing  press 
is  about  8,000  times.*  The  achievements  of  the  automatic 
machine  are  often  uncanny  in  their  imitation  on  a  grand 
scale  of  the  skill  of  the  human  hand  and  brain.  They  are 
the  typical  mechanical  facts  of  the  present  economic  age 
and  they  are  daily  being  extended  in  new  and  ingenious 
ways  to  all  branches  of  industrial  production.  They 
represent  standard  quality  of  products,  vastly  increased 
quantity  of  output,  and  large  scale  production  at  minimum 
cost.    This  development  is  nowhere  better  represented  than 

1  Goldmark,   "Fatigue  and  Efficiency,"  p.  61. 

2  United   States  Tariff  Commission  "^Report,   1918. 
3C.  H.  Parker,  Atlantic  Monthly,  Vol.  125,  pp.  12-22, 

*  Scientific   Manufacturer's   Supplement.    85:278. 


80  Scientific  Basis  of  Economics 

in  the  steel  industry,  where  "the  pig  casting  machines, 
the  open  hearth  charging  machines,  not  to  mention  the 
blast  furnace,  skip  hoist,  the  electric  crane,  and  the  me- 
chanically operated  rolling  mills  have  revolutionized  the 
industry.  For  the  most  part  the  steel  worker  of  to-day 
is  simply  moving  levers,  or  watching  and  waiting  while  the 
heat  and  machinery  do  the  work,"^ 

The  automatic  principle  is  capable  of  all  degrees  of 
application.  Some  machines  which  require  real  skill  and 
mechanical  training  are  commonly  called  "semi-auto- 
matic." Others  reduce  the  automatic  principle  to  a  mini- 
mum, and  rely  primarily  upon  a  high-grade  vocational 
training.  In  certain  operations  the  hand  tool  is  still  neces- 
sary. But  the  automatic  principle  runs  through  most 
mechanical  processes  in  some  form  or  other.  The  original 
industrial  revolution  was  attributed  to  the  invention  of 
machinery  and  the  use  of  power;  the  automatic  machine 
of  the  last  twenty  years  or  so  is  working  out  what  amounts 
to  a  second  industrial  revolution.  It  bids  fair  to  increase 
the  productive  power  of  the  nation  above  its  record  of 
twenty  years  ago  by  a  much  larger  ratio  than  the  original 
industrial  revolution  did  over  its  preceding  stage. 

Transportation 

Just  as  power  and  machinery  are  indispensable  in  the 
economic  order,  so  a  third  factor,  transportation,  may  claim 
indispensability.  Machinery  and  power  have  to  be  con- 
centrated in  small  circles  of  industrial  activity.  Then  the 
output  has  to  be  distributed  on  a  nation-wide  or  world- 
wide scale.  In  a  general  way,  this  importance  of  transpor- 
tation is  obvious  and  axiomatic. 

But  transportation  has  become  an  economic  problem  of 
the  first  magnitude.  Transportation  by  railroad  has  been 
strained  to  the  breaking  point."  In  spite  of  230,000  miles 
of  railroad  track,  bearing  2,500,000  freight  cars,  and  30,- 
000  freight  locomotives,  railroad  transportation,  at  times 
of  great  business  activity,  comes  perilously  near  to  break- 

1  Industrial  Management.  January  1,  1921.  p.  63.  H.  B.  Drury, 
Three  Shift  Syste/m,  address  before   Taylor  Society. 

2  Scientific  American,  October  30,  1920,  p.  440. 


Scientific  Basis  of  Economics  81 

down.  Upwards  of  one-third  of  all  freight  carried  is  coal. 
To  reduce  this  huge  burden,  electricity  is  being  called  to 
the  rescue.  A  super-power  zone  is  likely  to  be  developed 
within  the  next  few  years  in  the  general  Boston  to  Wash- 
ington district.  In  a  district  here  comprising  about  two 
per  cent,  of  the  area  of  the  country,  a  large  part  of  all 
industrial  activity  is  centered.  By  huge  central  stations, 
coal  energy  at  the  mouth  of  the  mine  can  be  converted 
into  electric  energy  and  transmitted,  free  from  any  freight 
problem,  for  manufacturing  uses,  or  electric  locomotive 
uses,  thereby  relieving  the  railroads  from  the  equivalent 
load  of  coal  freight.  The  harnessing  of  water  power  by 
electric  generators  will  serve  yet  further  to  solve  the  prob- 
lem. Into  the  heart  of  the  problem,  too,  comes  the  motor 
truck,  often  carrying  its  load  in  "fleets,"  and  growing  in 
importance  and  use  with  amazing  rapidity.  Ocean  trans- 
portation creates  the  merchant  marine  problem  for  both 
economists  and  statesmen  to  face,  and  the  prospect  of  re- 
ducing costs  of  shipping  by  substituting  oil  for  coal  as 
driving  energy  has  caused  a  sharp  rivalry  among  the  great 
world  powers  to  discover  and  possess  the  world's  future 
resources  of  oil. 

The  cheapest  and  most  efficient  form  of  transportation 
of  petroleum  has  proved  to  be  pipe  lines.  Such  lines  make 
possible  the  pumping  of  oil  from  the  Oklahoma  oil  wells  to 
the  New  Jersey  refineries  of  the  Standard  Oil  Company.  A 
grand  total  of  approximately  34,000  miles  of  pipe  lines 
provides  the  network  for  oil  transportation  over  the 
country. 

With  the  developments  of  automatic  and  standardized 
production  in  manufacturing  processes,  a  new  science  of 
intra- factory  transportation  has  grown  up.  "In  the  aver- 
age plant  to-day  from  the  time  raw  materials  leave  the 
storehouse  until  they  reach  the  finished  product  thej^  are 
actually  being  worked  on  less  than  one-third  of  the  time, 
while  in  certain  industries  the  ratio  is  as  low  as  one-sixth."  ^ 
This  idleness  occurs  in  the  interval  required  to  pass  the 

1  W.  F.  Merrill,  "Industrial  Management,"  LXI,  pp.  261-265,  April, 
1921. 


82  Scientific  Basis  of  Economics 

material  from  machine  to  machine.  Under  a  scientific 
routing  of  the  production,  and  an  ordering  of  the  processes 
in  natural  sequence,  the  material  is  carried  by  conveyors, 
belts,  trolleys  and  trucks  so  that  the  intervals  between  ma- 
chine operations  are  reduced  to  a  minimum.  Gaps,  pauses, 
delays,  waits  are  eliminated.  The  material  leaves  the 
storehouse  and  is  transported  mechanically  to  and  from 
each  machine  or  workman  in  order  of  sequence.  Lifting 
and  hauling  by  hand  is  done  away  with.  Each  specialized 
machine  operator  performs  his  unit  function  with  the  ma- 
terial as  it  passes  his  hands ;  the  next  piece  is  automatically 
at  hand  on  the  conveyor.  Automobile  manufacturing  was 
one  of  the  first  lines  of  industry  to  perfect  the  science,  but 
it  has  been  taken  up  widely,  and  such  industries  as  grocery 
food  products  manufacturing,  meat  packing,  mail  order 
handling,  sheet  metal  products  manufacturing,  and  boot 
and  shoe  manufacturing  take  advantage  of  its  methods.  In 
the  last  named  industry,  conveying  has  cut  the  time  inter- 
val of  manufacture  from  raw  material  to  finished  product 
from  eighteen  to  less  than  five  days.  In  textile  mills,  the 
process  of  manufacture  begins  at  the  top  story  of  the  fac- 
tory, and  the  product  follows  down  from  stage  to  stage,  in 
a  continuous  flow  from  machine  to  machine  and  floor  to 
floor,  without  any  carrying  by  hand.  The  economy  in 
floor  space,  in  time  saved,  in  labor  saved,  is  of  the  highest 
significance  for  productive  efficiency. 

A  branch  of  this  transportation  problem  has  been  the 
problem  of  loading  and  unloading  at  terminals.  A  great 
part  of  the  life  of  a  freight  car  is  spent  in  idleness,  wait- 
ing to  be  loaded  or  unloaded,  and  mechanical  facilities 
for  handling  material  at  terminals  reduces  such  periods 
of  idleness.  A  single  city  is  said  to  have  released  66,000 
freight  cars  formerly  used  in  local  transfer  and  switching 
service  by  utilizing,  on  a  large  scale,  electric  cranes,  mo- 
tor trucks,  and  conveyors.  The  loading  of  ships  has  at- 
tained marvels  of  efficiency  by  mechanical  contrivances  in 
the  form  of  conveyors,  hoisters,  cranes,  etc.  Quick  han- 
dling of  material  has  become  a  primary  necessity  in  effi- 
cient use  of  transport  facilities. 


Scientific  Basis  of  Economics  83 

The  demands  for  transportation  of  people  are  met  for 
the  most  part  by  three  great  types  of  machinery:  the  rail- 
road is  of  course  the  standard  means  of  long  distance  con- 
veyance ;  for  local  travel,  subways,  elevated  and  surface  car 
lines  are  the  chief  reliance;  and  the  past  twenty  years 
has  put  America  on  -wheels  with  the  automobile.  The  aero- 
plane is  of  value  within  limits,  but  has  not  yet  justified 
itself  for  wide-scale  commercial  uses.  The  correlation  of 
all  these  travel  services  affects  in  substantial  ways  the  lines 
of  economic  endeavor,  the  fields  of  new  investment,  and 
the  future  labor  question. 

In  a  broad  way,  it  may  be  said  therefore  that  the  trans- 
portation tendency  of  the  time  is  to  utilize  oil  and  electric 
substitutes  for  coal  in  transportation,  to  utilize  equip- 
ment fully  by  increasing  loading  and  unloading  efficiency, 
and  to  flood  the  country  with  the  automobile. 

Chemistry  ^ 

The  science  of  chemistry  has  become,  along  with  the  sci- 
ences of  power,  of  machinery,  and  of  transportation,  one 
of  the  indispensables  in  economic  organization.  The  im- 
portance of  chemistry  was  beginning  to  be  apparent  be- 
fore the  World  War,  but  it  took  the  demands  of  the  war 
period  to  demonstrate  beyond  question  the  imperative  im- 
portance of  the  science  in  modern  economic  technique. 
Most  concerns  now  make  use  of  chemical  tests  to  determine 
the  quality  of  the  material  which  enters  into  the  productive 
process.  Steel,  coal,  copper,  paint,  wood,  in  fact  almost 
every  commodity  must  measure  up  to  certain  chemical 
standards.  Only  by  that  means  can  the  manufacturer  be 
sure  of  the  standard  quality  of  his  finished  product.  The 
chemical  laboratory  has  become  a  necessary  part  of  the 
strategy  of  production.  Some  of  the  laboratories  are  of 
such  size  and  importance  that  they  employ  several  hundred 
chemists.      Any    conception    of    the    industrial    technique 

1  For  many  of  the  judgments  expressed  on  Chemistry,  the  author  is 
indebted  to  informatioii  and  suprcrpstions  given  by  W.  H.  Nichols, 
President  of  the  Eighth  Intprnational  Congress  of  Applied  Chem- 
istry and  Chairman  of  tlie  Allied  Chemical  and  Dye  Company,  and 
by  B.  C.  Hesse,  Secretary  of  the  Eighth  International  Congress. 


84  Scientific  Basis  of  Economics 

would  be  incomplete  without  an  idea  of  tlie  significance 
of  economic  chemistry. 

The  war  cut  American  manufacturers  off  from  their 
European  source  of  dye  supplies  and  forced  American 
chemists  to  work  out  processes  by  which  America  could  in 
large  measure  manufacture  her  own  supply.  "American 
industries  employing  over  two  million  men  and  women  and 
producing  over  three  billion  dollars'  worth  of  product  a 
year  are  dependent  upon  dyes."^  Among  such  industries 
are  textile  manufacturing,  leather  manufacturing,  paper 
making,  paint  and  ink  production.  The  dyes  are  a  chemi- 
cal by-product  of  the  coal  tar  industry.  The  chemistry  of 
coal  tar  dyes  is,  therefore,  an  indispensable  requisite  in  a 
large  proportion  of  our  needful  activities  in  peace  and  in 
war.  Artificial  daylight  as  the  outcome  of  the  chemical 
combination  of  gases  and  a  simultaneous  electrical  process 
promises  to  supply  all  the  properties  of  daylight.  Such  an 
achievement  will  have  many  important  consequences.  It 
will  make  work  more  safe,  will  relieve  the  strain  on  work- 
ers' eyes,  will  reduce  the  amount  of  spoiled  product,  will 
improve  the  quality  of  workmanship,  and  will  increase 
production.  In  industries  requiring  night  work  or  the 
three  shift  system,  the  service  of  chemically  produced  light 
will  obviously  be  of  highest  importance. 

Synthetic  ammonia  and  nitric  acid  derive  their  nitrogen 
from  the  atmosphere.  Before  the  war  America  drew  her 
nitrogen  from  the  nitrate  beds  of  Chile,  but  the  war  forced 
American  chemists  to  produce  nitrogen  within  her  own 
borders.  The  nitrogen  products  are  the  source  of  fertiliz- 
ers for  agriculture,  of  explosives  for  mining,  construction 
work,  and  war  needs.  They  are  necessary  in  the  manu- 
facture of  a  number  of  important  products  used  in  every- 
day economic  life. 

In  the  manufacture  of  steel,  chemistry  has  revolution- 
ized the  productive  process.  The  open  hearth  process  of 
steel  manufacture  has  gradually  superseded  the  Bessemer 
process  by  virtue  of  the  chemical  advantage  of  different 
alloys.  The  open  hearth  process  uses  a  high  grade  of 
1  Slosson,  "Creative  Chemistry,"  p.  83, 


Scientific  Basis  of  Economics  85 

ferromanganese,  whereas  the  Bessemer  process  uses  a  low 
grade  manganese  alloy.^  In  the  manufacture  of  high  speed 
tools,  such  as  lathes,  milling  cutters,  reamers,  hack-saws, 
etc.,  tungsten  alloys  are  employed.  It  was  Andrew  Car- 
negie who  declared  that  chemistry  "was  the  agency,  above 
all  others,  most  needful  in  the  manufacture  of  iron  and 
steel." 

The  oil  industry  owes  its  existence  to  chemistry.  Crude 
oil  is  not  used  much  directly,  but  after  a  refining  process 
in  which  chemical  science  plays  a  controlling  part  the 
crude  oil  becomes  converted  into  a  wide  variety  of  valuable 
materials.  Such  materials  include  local  anesthetics,  gaso- 
line for  internal  combustion  engines,  naphthas,  kerosenes 
for  light  and  for  farm  fuels,  lubricating  oils  and  greases, 
waxes,  and  paraffines,  surgical  dressings,  petroleum  coke 
for  battery  carbons,  road  oils  to  lay  the  dust,  asphalts  for 
paving,  and  fuel  oils  used  to  generate  manufacturing  and 
transportation  power.^ 

Copper  has  become  indispensable  since  the  electrical  in- 
dustry was  established.  Most  of  the  copper  now  produced 
is  used  in  that  industry.^  The  electrolytic  refining  of  cop- 
per is  an  electro-chemical  process  and  is  responsible  for  the 
development  of  the  copper  industry,  and  indirectly,  by 
making  possible  large  supplies  of  copper  wire  and  other 
copper  electrical  equipment,  for  the  momentous  develop- 
ment in  electrical  engineering. 

The  rubber  industry  has  become  an  enterprise  of  the 
first  magnitude  and  the  process  of  conversion  from  the 
raw  material  to  the  finished  rubber  is  dependent  upon 
chemical  guidance.  America's  automobile  industry  is 
made  possible  by  the  chemistry  of  rubber.  The  vulcaniza- 
tion process  is  a  tribute  to  chemical  science.  Synthetic 
rubbers  are  a  scientific  realization,  but  as  yet  are  not  con- 
sidered as  cheap  or  as  good  as  natural  rubber. 

Practically  every  industry  in  the  country  requires  the 
use  of  sulphur  in  some  form.     About  two  hundred  separate 

1  See  Ripley,  "Trusts,  Pools  and  Corporations,"  pp.   154-158. 

2  "United  States  Geolosical  Survey,  World  Atlas  of  Commercial 
Geography,"  Part  I,  1921,  p.  17. 

3  "World  Atlas  of  Commercial  Geography,"  Part  I,  1921,  p.  39. 


86  Scientific  Basis  of  Economics 

plants  in  the  United  States  are  engaged  in  the  manufac- 
ture of  sulphuric  acid.  "Hundreds  of  thousands  of  tons 
of  sulphuric  acid  is  consumed  every  year  in  making  fer- 
tilizers and  tens  of  thousands  of  tons  in  refining  petroleum, 
in  pickling  and  galvanizing  steel,  and  in  making  chemicals 
and  drugs."  ^  If  there  is  any  one  chemical  element  which 
holds  industry  at  its  mercy  more  than  any  other,  it  is 
sulphuric  acid. 

"Dishes  and  utensils  of  platinum  are  absolutely  neces- 
sary in  all  chemical  laboratories,  and  upon  their  laborato- 
ries all  great  industries  are  dependent  for  guidance. ' '  - 

It  is  undesirable  to  go  into  exhaustive  details  on  the 
economic  uses  of  chemistry.  The  science  plays  a  neces- 
sary part  in  the  manufacture  of  perfumes  and  flavors; 
cellulose  is  a  chemical  product,  valuable  in  the  manufac- 
ture of  paper  goods,  laces,  cloths,  etc.  Chemistry  distills 
wood  into  crude  alcohol.  It  lies  behind  the  production 
of  gums  and  resins.  The  enumeration  could  be  extended 
indefinitely. 

One  of  the  most  significant  contributions  of  chemical 
science  to  production  has  been  in  the  utilization  of  by- 
products and  waste  materials.  The  immense  importance 
of  by-products  in  the  coal  industry  has  already  been  men- 
tioned. It  has  been  reported  that  the  utilization  of  wastes 
in  the  meat  packing  industries  is  the  means  by  which  those 
industries  make  substantial  profits.  Radium  has  been 
manufactured  out  of  materials  that  were  formerly  con- 
sidered useless  junk.  Slosson  claims  that  two-thirds  of 
the  cotton  crop  is  cotton  seed.  Formerly  it  was  thrown 
away.  Chemical  discoveries  have  made  possible  the  utili- 
zation of  the  seed  for  human  and  animal  foods,  for  oil  and 
lard  compounds,  for  fertilizers,  and  for  many  other  pur- 
poses. 

The  scientific  technique  of  production  is  clearly  depen- 
dent upon  the  discoveries  of  chemistry.  There  seems  little 
doubt  but  that  chemistry  has  a  yet  more  important  con- 

1  "World  Atlas  of  Commercial  Geography,"  Part  I,  1921,  p.  57. 
Also  see  United  States  Geological  Survey  Bulletin,  No.  666,  p.  19. 

2  Bulletin,  No.  666,  p.  35. 


Scientific  Basis  of  Economics  87 

tribution  to  make  in  the  future.  The  possibilities  of 
cheapening  the  cost  of  production,  of  inventing  new  goods 
for  the  satisfaction  of  human  wants,  and  of  increasing  and 
improving  the  country's  output  are  wrapped  up  in  largo 
measure  with  the  future  of  chemical  science. 

Geology 

The  development  of  national  resources  is  indebted  to 
the  science  of  geology.^  Formerly,  the  location  of  indus- 
tries was  decided  in  very  large  measure  by  the  proximity  of 
raw  materials  and  markets,  but  in  various  lines  of  in- 
dustry to-day,  "a  New  England  workshop  may  draw  its 
materials  from  the  five  continents  and  ship  its  products 
around  the  world.  ...  It  is  no  longer  enough  for  us 
to  make  an  inventory  of  the  mineral  wealth  of  the  United 
States;  we  must  supplement  that  inventory  by  a  broad 
understanding  of  world  demand  and  supply.  .  .  .  Knowl- 
edge of  what  the  world  contains  is  plainly  the  best  basis  for 
discussing  public  policy  and  planning  private  business."^ 

Economic  geology  furnishes  surveys  of  the  location  of 
the  earth's  resources  and  estimates  of  their  amount  and 
value.  By  scientific  analysis  of  rock  formations  and  care- 
ful calculation  of  underground  resources,  geology  supplies 
the  business  executive  with  invaluable  information  in  the 
planning  of  business  undertakings.  To  know  where  beds 
of  iron  ore  of  various  grades  exist  and  approximately  their 
underground  area,  to  have  a  map  of  the  resources  of  differ- 
ent grades  of  coal,  to  have  world  diagrams  of  the  important 
oil  supplies,  to  have  knowledge  of  the  countries  containing 
the  future  supplies  of  silver,  gold  and  other  precious 
minerals, — these  are  a  few  illustrations  of  the  fundamental 
value  of  geological  information  in  economic  calculations. 

A  more  specific  illustration  of  the  usefulness  of  geological 
science  in  economic  planning  is  contained  in  the  geology 
of  oil.  Petroleum  has  become  the  "preferred  fuel  of  the 
twentieth  century."     Fuel  oil  and  gasoline  are  now  com- 

1  G.  0.  Smith,  "The  Rtrato^  of  Minerals." 

2  "United  States  Ueolopical  Survey,  World  Atlas  of  Commercial 
Geography,"  Part    1,    1921,  Introduction. 


88  Scientific  Basis  of  Econojnics 

mercial  necessities  and  national  leadership  on  the  sea  and 
in  the  air  has  come  to  depend  absolutely  upon  the  pos- 
session of  adequate  supplies  of  these  two  commodities. 
Petroleum  supplies  have  been  explored  and  surveyed  all 
over  the  world.  The  findings  of  the  geologists  indicate 
that  the  w'orld's  supply  of  petroleum  during  the  next  dec- 
ade will  come  mainly  from  South  American  countries 
that  border  the  Caribbean  Sea,  from  Mexico  and  from 
Mesopotamia  and  Persia.  International  rivalries  for  con- 
trol of  these  sources  are  conspicuous  in  political  and  econo- 
mic statesmanship  among  the  Great  Powers.  Knowledge 
of  the  probable  duration  and  capacity  of  the  richest  oil 
wells  is  indispensable  in  all  such  deliberations. 

Economics  is  thus  obliged  to  take  into  its  reckoning  the 
findings  of  geological  scientists,  and  their  discoveries  are 
an  integral  part  of  the  mechanical  and  scientific  technique 
of  modern  industry. 

Electricity 

Many  of  the  contributions  of  electrical  science  have  al- 
ready been  mentioned  in  this  chapter.  Electrical  engineer- 
ing has  reshaped  many  manufacturing  processes,  and  has 
made  possible  new  production  achievements  which  were 
considered  impossible  less  than  a  generation  ago. 

Electricity  has  come  into  almost  universal  use  for  light- 
ing purposes.  Electric  lighting  has  come  to  be  a  science 
in  itself.  The  flaming  arc  light,  the  electric  mercury 
lamp,  the  incandescent  bulb,  and  the  ordinary  electric  arc 
are  the  most  important  forms.  By  proper  adaptation  of 
these  forms  to  the  particular  needs  of  factories,  offices, 
streets  and  households,  the  engineers  are  able  to  furnish 
reasonable  comfort,  safety  and  efficiency. 

The  value  of  electricity  for  power  has  in  part  been  re- 
ferred to  previously.  Electric  cranes  for  hoisting  ma- 
terials, electric  trucks,  electric  mining  machinery,  electric 
ventilators,  electric  locomotives,  electric  railways,  electric 
automatic  machines, — these  are  a  few  of  the  more  impor- 
tant poAver  adaptations.  It  is  estimated  that  between  the 
years  1914  and  1919  the  amount  of  electrical  energy  sold 


Scientific  Basis  of  Economics  89 

for  power  consumption  in  the  country  nearly  trebled.  Al- 
ready there  are  over  one  million  industrial  motors  served 
by  central  power  stations.  One  of  the  largest  automobile 
manufacturing  plants  has  found  it  advisaible  to  install  in 
all  new  construction  an  individual  motor  for  each  machine. 
"The  increased  cost  of  energy,  belting  and  shafting,  the 
need  of  better  factory  lighting,  the  advantage  of  having 
better  working  conditions  and  the  responsibility  imposed 
on  manufacturers  by  workmen's  compensation  laws  are 
among  the  chief  reasons  which  led  to  the  almost  universal 
adoption  of  individual  drive  by  this  company."  For  both 
manufacturing  and  transportation  purposes,  electric  power 
has  rapidly  increased  in  application  during  the  last  ten 
years.  Its  possibilities  for  the  future  are  of  primary  sig- 
nificance. 

Electric  heating  is  of  increasing  use  in  manufacturing 
processes.  The  electric  furnace  for  manufacturing  steel, 
especially  the  high  grade  .steel  products,  is  a  practicable 
realization.  Electric  welding  has  been  widely  adopted. 
Electric  treatment  in  the  refining  process  of  a  number  of 
minerals  has  proved  its  value. 

Electric  contrivances  for  home  convenience  and  domestic 
work-saving  have  been  the  object  of  a  great  deal  of  in- 
ventiveness. Electric  cookers,  washeirs,  ironers;  electric 
vacuum  sweepers  and  cleaners, — these  with  a  long  list  of 
other  inventions  have  stimulated  large  and  growing  manu- 
facturing enterprises  in  the  electrical  field. 

Electric  communication  is  of  the  utmost  utility  in  the 
present  delicate  and  intricate  economic  organization.  The 
ability  to  flash  news  from  continent  to  continent  determines 
huge  financial  investments  and  the  ability  of  the  chief  ex- 
ecutives of  the  large  scale  combinations  of  plants  to  keep 
in  touch  with  the  activities  of  all  subsidiary  branches  and 
to  direct  their  affairs  smoothly  and  efficiently  rests  upon 
the  telephone  and  telegraph.  A  strike  of  telegraph  and 
telephone  operators  would  be  virtually  as  serious  for  the 
country  as  a  strike  of  the  railroad  workers  themselves. 
There  are  over  thirteen  million  telephone  stations  in  the 
United  States. 


90  Scientific  Basis  of  Economics 

Many  large  corporations  have  found  electricity  of  such 
importance  that  they  have  established  laboratories  for  elec- 
trical research.  A  conspicuous  example  is  the  American 
Telephone  and  Telegraph  Company  whose  laboratories  en- 
gage thirteen  hundred  scientists  and  engineers  to  devote 
their  time  exclusively  to  research  and  development  in  the 
telephone  art. 

The  financial  consequences  of  the  rise  of  electrical  in- 
dustries are  considerable.  The  total  output  of  all  electrical 
materials  in  1920  is  estimated  at  about  $2,000,000,000. 
Moreover,  it  seems  a  reliable  estimate  that  by  1930  the 
electrical  industries  will  require  upwards  of  $10,000,000,- 
000  for  new  capital  in  the  form  of  new  plants  and  manu- 
facturing facilities.  In  its  various  relations,  therefore, 
electricity  has  come  to  occupy  an  indispensable  position  in 
the  technique  of  the  industrial  process. 

The  Science  of  Economic  Organization 

So  numberless  are  the  factors  in  the  mechanical  tech- 
nique, so  various  are  they  in  their  bearing  upon  different 
parts  of  the  economic  process,  so  indispensable  are  they 
to  the  operation  of  the  system,  and  so  interdependent  are 
all  of  their  functions  in  the  scheme  of  things,  that  a 
science  of  organization  has  become  imperative.  Justice 
Louis  Brandeis  of  the  United  States  Supreme  Court  has 
observed  that,  "The  field  of  knowledge  requisite  to  the 
more  successful  conduct  of  business  has  been  greatly  widened 
by  the  application  to  industry  not  only  of  chemical, 
mechanical,  and  electrical  science,  but  also  the  new  science 
of  management;  by  the  increasing  difficulties  involved  in 
adjusting  the  relations  of  labor  to  capital ;  by  the  necessary 
intertwining  of  social  with  industrial  problems;  by  the 
ever-extending  scope  of  state  and  federal  regulation  of 
business.  .  .  .  This  new  development  is  tending  to  make 
business  an  applied  science,"^ 

This  applied  science  has  a  number  of  important  branches. 
John  Dewey  states,  "The  most  important  occupations 
of  to-day  represent  and  depend  upon  applied  mathe- 
1  "Business  a  Profession,"  pp.  2-3. 


Scientific  Basis  of  Economics  91 

matics,  physics  and  chemistry."  The  whole  science  of  or- 
ganization in  the  strictest  sense  involves  the  correlation 
and  administration  of  countless  mechanical  and  human 
factors.  The  engineer  is  the  typical  scientific  expert  in 
the  field.  There  are  in  the  United  States,  it  is  estimated, 
Tipvrards  of  200,000  engineers  of  one  kind  and  another  as- 
sociated in  engineering  societies.  Twenty-one  major  socie- 
ties are  united  in  The  Federated  American  Engineering 
Societies,  and  utilize  their  central  association  for  the  pur- 
pose of  advancing  the  sciences  of  technical  engineering. 
Typical  of  the  branch  societies  are  the  mechanical,  the 
electrical,  the  mining,  the  chemical  and  the  industrial 
engineers. 

A  capital  illustration  of  the  possibilities  of  engineering 
science  is  found  in  the  achievements  of  F.  W.  Taylor  in 
improving  the  art  of  cutting  metals.  He  carried  on  up- 
wards of  50,000  experiments  over  a  period  of  twenty-six 
years.  The  real  problem  was  "how  to  remove  chips  from 
a  casting  or  a  forging,  and  how  to  make  the  piece  smooth 
and  true  in  the  shortest  time."  The  experiments 
developed  twelve  variables  which  involved  a  very  in- 
tricate mathematical  solution.  These  variables  related 
to  (1)  the  hardness  of  the  metal,  (2)  the  chemical  composi- 
tion, (3)  the  thickness  of  the  shaving  of  metal,  (4)  the 
shape  of  the  cutting  edge,  (5)  the  use  of  a  cooling  stream 
of  water  on  the  cutting  tool,  (6)  the  depth  of  the  cut, 
(7)  the  duration  of  the  cutting  process,  (8)  the  lip  and 
clearance  angles  of  the  tool,  (9)  the  elasticity  of  the  work 
and  of  the  tool,  (10)  the  diameter  of  the  material  being  cut, 
(11)  the  pressure  of  the  chip  or  shaving  on  the  cutting 
edge,  (12)  the  pulling  power  and  the  speed  and  feed 
changes  of  the  machine.  An  expert  mathematician  might 
be  able  to  solve  a  single  problem  of  variables  in  from  two 
to  six  hours.  This  would  take  too  long  for  practical  pur- 
poses and,  of  course,  the  average  worker  would  be  any- 
thing but  an  expert  mathematician.  A  way  of  simplifying 
the  mathematical  calculation  was  sought,  so  that  the  aver- 
age workman  could  adjust  the  speed  and  feed  of  his 
machine  quickly  and  accurately.     The  whole  problem  was 


92  Scientific  Basis  of  Economics 

from  time  to  time  presented  by  Taylor  to  one  after  another 
of  the  noted  mathematicians  of  the  country.  The  mathe- 
maticians declared  the  problem  hopeless  of  solution,  but 
finally  some  experts  under  Taylor's  supervision  discovered 
the  principle  of  the  slide  rule.  "By  means  of  this  slide 
rule,  one  of  these  intricate  problems  can  be  solved  in  less 
than  a  half  minute  by  any  good  mechanic,  whether  he 
understands  anything  about  mathematics  or  not,  thus  mak- 
ing available  for  everyday,  practical  use  the  years  of  ex- 
perimenting on  the  art  of  cutting  metals."  Thereafter, 
"with  the  aid  of  a  slide  rule  ...  it  was  possible  for  the 
scientifically  equipped  man,  who  had  never  before  seen 
these  particular  jobs,  and  who  had  never  worked  on  this 
machine,  to  do  work  from  two  and  one-half  to  nine  times 
as  fast  as  it  had  been  done  before  by  a  good  mechanic  who 
had  spent  his  whole  time  for  some  ten  or  twelve  years  in 
doing  this  very  work  upon  this  particular  machine."^ 

Technical  engineering  is  obviously  necessary  for  the  ef- 
fective co-ordination  of  all  the  factors  of  mechanical  and 
applied  science.  The  multitudinous  details  have  to  be 
related,  the  machines  properly  arranged,  inventions  and 
discoveries  adequately  sought  for,  the  power  facilities  effi- 
ciently connected,  the  mechanical  equipment  suitably  in- 
stalled, and  all  brought  into  a  single  clock-work  of  efficient 
functioning. 

Another  branch  of  the  applied  science  of  management 
is  human  engineering.  The  task  of  fitting  men  to  machine 
work,  of  securing  interest  in  work  and  developing  morale 
and  loyalty,  of  stimulating  motives  and  making  the  ma- 
chine technique  develop  rather  than  retard  the  human 
personality, — the  whole  task  of  handling  men  in  their  in- 
dustrial pursuits  has  evoked  the  science  of  industrial,  or 
human,  relations.  It  is  here  that  the  principles  of  psychol- 
ogy become  of  primary  value,  for  the  problem  is  essentially 
one  of  understanding  human  behavior,  and  directing  human 
conduct. 

A  further  branch  includes  all  the  other  activities  of 
management  which  fit   the  technology  of  the  productive 

iF.  W.  Taylor,  "Principles  of  Scientific  INTanagement,"  pp.  99-113. 


Scientific  Basis  of  Econoimcs  i93 

equipment  and  the  behavior  of  the  human  equipment  into 
the  price  system  of  the  economic  order.  The  ownership  of 
the  mechanical  equipment,  the  methods  of  remunerating 
the  human  equipment,  the  structure  and  operation  of  the 
market  in  all  of  its  ramifications  of  buying  and  selling, 
the  maintenance  of  the  credit  system  of  banking  and  in- 
vestment, the  adjustments  of  international  commerce  and 
finance, — all  of  these  must  be  statistically  measured, 
charted,  judged,  forecasted,  recorded,  and  related.  The 
interconnections  of  all  the  parts,  the  indispensable  adjust- 
ments from  the  beginning  to  the  end  of  the  whole  process, 
the  co-ordination  of  methods  and  the  formulation  of  har- 
monious principles,  require  the  most  careful  application  of 
scientific  methods  to  the  general  unifying  problem  of  man- 
agement. The  mechanical  and  scientific  basis  of  modern 
production  would  result  in  utmost  chaos  were  it  not  for 
the  steady  unifying  power  of  the  applied  science  of  manage- 
ment which  holds  all  parts  of  the  technological  universe  in 
their  proper  courses. 

Psychology  of  Engineers  and  Inventors 

The  motives  of  the  men  who  have  created  the  mechanical 
inventions  and  made  the  scientific  discoveries  which  under- 
lie the  whole  technology  of  the  economic  system  are  for 
the  most  part  of  a  distinct  type.  The  paramount  motives 
of  inventors  and  scientists  differ  in  no  small  degree  from 
the  paramount  motives  of  the  owners  of  the  economic 
equipment.  In  the  former,  the  constructive  impulse,  the 
creative  bent,  the  instinct  of  curiosity  are  particularly 
strong.  Unflagging  scientific  curiosity  impels  men  to 
protracted  and  exhaustive  research  until  a  new  scientific 
law  is  discovered,  or  a  new  chemical  element  revealed, 
or  a  new  electrical  principle  arrived  at.  The  motives  un- 
derlying discovery  and  invention  are  comprehensively 
stated  by  a  vice  president  of  the  American  Telephone  and 
Telegraph  Company  as  follows:  ''Pure  scientific  research 
is  conducted  with  a  philosophic  purpose,  for  the  discovery 
of  truth,  and  for  the  advancement  of  learning.  .  .  .  The 
work  of  the  pure  scientists  is  conducted  without  any  utili- 


94i  Scientific  Basis  of  Economics 

tarian  motive,  for  as  Huxley  says,  'that  which  stirs  their 
pulses  is  the  love  of  knowledge  and  the  joy  of  discovery 
of  the  causes  of  things  ....  the  supreme  delight  of  ex- 
tending the  realm  of  law  and  order  ever  farther  toward  the 
unattainable  goals  of  the  infinitely  great  and  the  infinitely 
small,  between  which  our  little  race  of  life  is  run.'  The 
pure  scientists  are  the  advance  guard  of  civilization.  By 
their  discoveries,  they  furnish  to  the  engineer  and  indus- 
trial chemist  and  other  applied  scientists  the  raw  material 
to  be  elaborated  into  manifold  agencies  for  the  ameliora- 
tion of  the  condition  of  mankind.  ...  I  do  not  say  this 
because  a  new  incentive  is  necessary  for  the  pure  scientist, 
for  in  him  there  must  be  something  of  the  divine  spark  and 
for  him  there  is  no  higher  motive  than  the  search  for  the 
truth  itself."^  A  National  Research  Council  has  been 
formed  in  the  United  States  for  the  sake  of  organizing 
and  promoting  research  along  scientific  lines.  Through  the 
systematized  effort  of  this  scientific  body  and  through  the 
individual  investigations  scattered  over  the  country,  the 
technology  of  the  productive  system  is  steadily  improved 
and  enlarged.  The  solution  of  problems  of  efficiency, 
safety,  health,  and  wealth  rests  in  fundamental  ways  upon 
the  progress  thus  achieved  in  industrial  and  scientific  re- 
search.^ 

A  preponderant  creative  impulse  is  likewise  obvious  in 
the  lives  of  the  general  run  of  inventors.  In  an  original 
study  of  the  psychology  of  inventors,  F.  W.  Taussig  re- 
marks, "One  thing  stands  out  conspicuously:  the  race 
of  contrivers  and  inventors  does  obey  an  inborn  and  ir- 
resistible impulse.  Schemes  and  experiments  begin  in 
childhood,  and  persist  so  long  as  life  and  strength  hold. 
It  matters  not  whether  a  fortune  is  made  or  pecuniary  dis- 
tress is  chronic :  there  is  increasing  interest  in  new  dodges, 
unceasing  trial  of  new  devices.  ...  It  would  seem  that  no 
satisfaction  from  pecuniary  success  or  worldly  recognition 
equals  the   absorbed  interest  of  trial,   experiment,   novel 

1  J.  J.  Cartv,  Bulletin  Xo.  8,  National  Research  Council,  February 
6,   1920,  p.  5.' 

2  Yerkes,  "The  New  World  of  Science,"  pp.  xii-xiii. 


Scientific  Basis  of  Economics  95 

problems,  happy  solutions."^  Inventiveness  is  not,  how- 
ever, an  unmixed  motive.  It  is  intertwined  with  others 
in  a  wide  variety  of  combinations,  depending  upon  the 
individual  instinctive  equipment  and  upon  the  experience 
of  the  personality.  The  desire  for  public  service,  for  the 
general  welfare,  for  the  national  defense,  frequently  is 
prominently  mixed  with  inventiveness.  The  desire  for 
profit  from  the  invention  is  usually  present  and  often  plays 
a  vital  part  in  directing  the  course  of  the  inventive  in- 
stincts. It  is  a  common  matter  for  the  inventor  to  give  his 
time  and  energy  to  that  problem  which  promises  the  larg- 
est money  reward.  Patent  rights  are  jealously  guarded. 
Yet  the  inventor  is  notoriously  lacking  in  business  sagacity, 
and  is  the  easy  victim  of  unscrupulous  contractors.  The 
illustrations  are  frequent  where  the  inventor  is  persuaded 
to  sell  his  invention  for  a  fraction  of  its  real  value.  Busi- 
ness ventures  by  professional  inventors  suffer  an  abnor- 
mally high  degree  of  failures.  The  hope  of  pecuniary 
gain  is  indispensable  to  call  forth  the  most  effective 
inventiveness  of  men  in  the  present  economic  organization. 
But  underneath,  the  major,  propelling  instinctive  factor 
is  the  pure  love  of  making  something  new.  That  class  of 
men  who  have  given  society  its  stock  of  mechanical  inven- 
tions and  processes,  prove  the  power  and  vigor  of  the 
motive  of  creativeness. 

The  motives  in  those  classes  of  engineers  which  control 
and  manage  and  direct  the  whole  mechanical  and  scientific 
technique  exhibit  essentially  the  same  combination  of  in- 
stinctive dispositions.  Engineers  arc  not  indifferent  to 
high  salaries,  and  generally  speaking,  seek  for  the  position 
which  offers  the  highest  pecuniary  reward.  Nor  are  they 
indifferent  to  considerations  of  the  welfare  of  the  country, 
and  the  means  of  promoting  it.  But  the  pivotal  instinctive 
energies  which  have  been  most  conspicuous  among  the  en- 
gineers of  all  classes  are  those  of  constructive  achieve- 
ment, productive  efficiency,  and  advance  in  scientific 
management.  The  psychology  of  this  group  is  reflected  in 
a  declaration  of  principles  made  by  the  leading  industrial 
i¥.  W.  Taussig,  "Iirventors  and  Money  Makers,"  pp.  21-22,  48-54. 


96  Scientific  Basis  of  Economics 

engineers  of  the  United  States  in  1919.  This  declaration 
reads  in  part  as  follows :  * '  The  prevalent  unrest  in  industry- 
results  from  a  system  which  permits  the  acquisition  of 
wealth  for  which  no  adequate  service  has  been  rendered 
and  tolerates  special  privilege  with  the  resulting  exploita- 
tion of  men,  women  and  children. 

"Great  powers  have  been  used  arbitrarily  and  auto- 
cratically to  exact  unmerited  profit  or  compensation  by 
both  capital  and  labor.  This  policy  of  exacting  profit 
rather  than  rendering  service  has  wasted  enormous  stores 
of  human  and  natural  resources  and  has  put  in  places  of 
authority  those  who  seek  selfish  advantage  regardless  of  the 
interests  of  the  community.  "^  The  conduct  of  the  en- 
gineers as  a  class  demonstrates  the  practicability  in 
economic  affairs  of  drawing  upon  the  instincts  of  con- 
structiveness,  achievement,  public  service,  and  economic 
usefulness.  Wherever  pecuniary  motives  come  sharply  in 
conflict  with  these  motives,  they  have  been  curbed  to  a 
striking  degree  by  the  profession  of  engineering.  Wher- 
ever pecuniary  motives  could  go  hand  in  hand  with  these 
other  motives,  the  combination  has  been  made,  with  a  gain 
in  intensity  and  in  scope  of  achievement. 

The  possibility  of  an  overhauling  of  economic  motives  is 
thus  seen  to  be  one  not  altogether  theoretical  and  specula- 
tive. At  the  basis  of  the  economic  order  rests  the 
mechanical  and  scientific  technique.  It  has  been  invented, 
step  by  step,  and  is  steadily  organized  and  managed  by 
types  of  men  in  whom  motives  of  constructiveness,  curios- 
ity, achievement  and  usefulness  are  primary.  The  careful 
observation  of  the  distinguished  English  economist,  Alfred 
Marshall,  is  that  "it  is  true  that  the  best  energies  of  the 
ablest  inventors  and  organizers  of  improved  methods  and 
appliances  are  stimulated  by  a  noble  emulation  more  than 
by  any  love  of  wealth  for  its  own  sake."^ 

Those  people  who  are  accustomed  to  insist  that  unre- 
stricted and  unlimited  profit-making  is  the  alpha  and 
omega  of  business  psychology,  and  who  prophesy  with  em- 

">■  Industrial  Management,  November,  1919,  Vol.  LVTII,  p.  419. 
2  "Principles  of  Economics,"  1916  edition,  p.  14. 


Scientific  Basis  of  Economics  97 

phatic  certainty  that  any  attempt  to  mold  economic  in- 
stitutions and  social  standards  in  forms  calculated  to  put 
motives  of  constructive  achievement  to  the  front  is  a 
move  toward  making  business  motives  anemic  and  effete, 
face  some  basic  facts  in  the  psychology  of  inventors  and 
engineers  which  do  not  square  with  their  theories.  En- 
gineers, administrators,  organizers,  inventors  are  a  liv- 
ing demonstration  of  the  virility  and  vigor  of  men  act- 
ing under  a  high  degree  of  constructive  and  creative 
motivation,  and  there  seems  no  doubt  that  executives 
and  managers  of  business  establishments  are  undergoing 
a  gradual  evolution  of  a  similar  sort  in  their  motivation. 
The  forceful  words  of  C.  H.  Cooley  are  directly  to  the 
point:  "One  of  the  main  forces  in  keeping  economic 
motive  on  a  low  moral  level  has  been  the  doctrine  that 
selfishness  is  all  we  need  or  can  hope  to  have  in  this  phase 
of  life.  Economists  have  too  commonly  taught  that  if 
each  man  seeks  his  private  interest  the  good  of  society 
will  take  care  of  itself,  and  the  somewhat  anarchic  con- 
ditions of  the  time  have  discouraged  a  better  theory.  In 
this  way  we  have  been  confined  in  a  pernicious  state  of 
belief  and  practice,  for  which  discontent,  inefficiency,  and 
revolt  are  the  natural  penalty.  A  social  system  based  on 
this  doctrine  deserves  to  fail.  ...  It  is  false  even  as 
economics,  and  we  shall  never  have  an  efficient  system  until 
we  have  one  that  appeals  to  the  imagination,  the  loyalty, 
and  the  self-expression  of  the  men  who  serve  it.  .  .  .  There 
is  a  trend  throughout  society  to  substitute  higher  motives 
for  lower,  and  this  is  not  only  because  the  former  are 
more  agreeable,  but  because  they  are  more  effectual."^ 

Certainly  nothing  could  be  of  deeper  significance  for  the 
future  of  economic  welfare  than  a  gradual  evolution  of 
general  business  instincts  and  motives  along  the  lines  pre- 
valent in  the  men  who  invent  and  administer  the  techni- 
cal foundations  of  all  economic  life, — ^the  engineers,  scien- 
tists and  inventors.  Among  these  men,  non-pecuniary 
motives  are  for  the  most  part  in  the  ascendency,  and  bring 
about  the  solidly  constructive  accomplishments  of  the 
1  "Social  Process,"  pp.   132,  135,  136. 


98  Scientific  Basis  of  Economics 

mechanics  and  science  of  production.  Pecuniary  motives 
are  present  and  mix  constantly,  but  the  other  motives  are 
also  fundamental.  Their  practicability  is  thereby  demon- 
strated. 

REFERENCES 

BoGART,  E.  L.:   Economic  History  of  the  United  States,  pp.  356- 

400 
Callender,  G.  S.:  Economic  History  of  the  United  States,  pp. 

471-487 
MacVey:   Modern  Industrialism,  pp.  3-19;  133-156 
Veblen,  T.  :   Theory  of  Business  Enterprise,  Chapter  I. 
Abstract  of  Census  of  Manufacturing,  1914 
Report  of  United  States  Bureau  of  Mines,  1920 
PoLAKOV,  W.  N.:  Industrial  Management,  Sept.,  1920,  pp.  234- 

239 
Scientific  American  Supplement,  85:  278 
Goldmark:   Fatigue  and  Efficiency 

Lloyd,  E.  F.:  Journal  of  Political  Economy,  Vol.  27,  p.  457 
United  States  Tariff  Commission  Report,  1918 
Parker,  C.  H.:  Atlantic  Monthly,  Vol.  125,  pp.  12-22 
Drury,  H.  B.:   Three    Shift    System,    Industrial    Management, 

Jan.  1,  1921,  p.  63 
Marshall,  L.  C.  :  Readings  in  Industrial  Society,  pp.  417-467 
Merrill,  W.  F.:  Industrial  Management,  Vol.  6,  pp.  261-265 
Slosson:  Creative  Chemistry 
United  States  Geological  Survey,  World  Atlas  of  Commercial 

Geography,  Part  I,  1921 
United  States  Geological  Survey,  Bulletin  No.  66 
Taylor,  F.  W.  :  Principles  of  Scientific  Management 
Carty,  J.  J.:   Research  Council,  Bulletin  No.  8,  1920 
Yerkes:  The  New  World  of  Science 
Taussig,  F.  W.:  Inventors  and  Money  Makers 
Marshall  and  Lyon:  Our  Economic  Organization,  Chapters  6, 

8-14,  23-25 
Thompson,  Holland:  The  Age  of  Invention 
Marsh:  The  Evolution  of  Automatic  Machinery 
Marshall,  A.:  Industry  and  Trade,  Books  I  and  II 
Reitell,  Chas.  :  Journal  of  Political  Economy,  Vol.  26,  p,  274  ff. 
Friedman,  E.:  American  Problems  of  Reconstruction,  pp.  89- 

150 
Lippincott:  Economic  Development  of  the  United  States 
Adams,  H.  C.  :  Description  of  Industry 
Keir,  M.  :     Manufacturing  Industries  in  the  United  States 
FiSKE,  B.  A.:  Invention:  The  Master  Key  to  Progress 


CHAPTER  VI 

LABOR:  ITS  PART  IN  PRODUCTION 

The  objective  of  labor  activity  in  industry  is  the  pro- 
duction of  goods  or  the  rendering  of  services.  The  goods 
may  be  intended  either  for  immediate  consumption  or  for 
the  production  of  other  goods,  and  the  services  may  vary 
from  those  rendered  by  a  domestic  servant  to  those  ren- 
dered by  a  factory  workman.  ^ 

The  chief  factors  in  production  are  land,  labor,  capital 
and  management.  The  distinguishing  function  of  labor  is 
the  operation  of  machinery,  and  the  handling  of  material. 
This  function  of  labor  is  performed  under  the  direction  and 
guidance  of  management.  The  material  and  machinery 
are  the  capital  which  is  ultimately  under  the  control  of 
the  owners..  Labor's  part  in  production  is  distinctly  con- 
fined to  the  following  out  of  plans,  methods,  and  processes 
under  the  guidance  of  powers  higher  up.  It  is  not  labor's 
function  to  decide  whether  new  machinery  shall  be  in- 
stalled, or  who  shall  own  the  machinery,  or  where  the  ma- 
terial shall  come  from  or  to  whom  the  finished  product 
shall  be  sold.  Labor  feeds  raw  material  into  the  machine, 
lifts  the  levers  and  fingers  the  controls,  takes  the  product 
away  from  the  machine  and  either  by  hand  or  by  the 
manipulation  of  further  machinery  transports  the  machine- 
made  product  to  places  where  it  can  be  used. 

This  restriction  of  labor's  function  was  carried  to  an  ex- 
treme in  what  has  come  to  be  known  as  Scientific  Manage- 
ment.   To  quote  F.  W.  Taylor,  "In  almost  all  the  mechanic 

1  "Labor"  has  come,  by  general  usage,  to  mean  productive  effort 
which  involves  a  substantial  amount  of  manual  and  muscular  energy. 
This  usage  of  tlie  term  does  not  imply  that  the  mental  energy 
expended  by  management  is  not  labor;  nor  does  it  imply  that  laborers 
are  lacking  in  mental  capacity.  The  generally  accepted  meaning  of 
the  term  is  the  one  in  use  in  the  analysis  of  this  chapter. 

99 


100  Labor:  Its  Part  in  Production 

arts,  tlie  science  whicli  underlies  each  act  of  each  work- 
man is  so  great  and  amounts  to  so  much  that  the  work- 
man who  is  best  suited  to  actually  doing  the  work  is  in- 
capable of  fully  understanding  this  science  without  the 
guidance  and  help  of  those  who  are  working  with  him  or 
over  him,  either  through  lack  of  education  or  through  in- 
sufficient mental  capacity."  In  the  carrying  out  of  this 
division  of  function,  the  part  of  management  is  to  plan, 
to  invent,  to  conceive  new  ways  of  doing  things,  to  plot 
new  arrangements  of  machinery,  to  devise  the  science  of 
production  from  beginning  to  end.  At  the  same  time,  the 
part  of  labor  is  unquestioning  acceptance  of  the  technology 
worked  out  by  management.  Labor's  part  is  primarily 
muscular  and  only  secondarily  mental.  Labor's  part  is  to 
use  the  fingers,  the  hands,  the  arms,  the  eyes,  the  ears,  in 
lifting,  watching,  pushing,  pulling,  carrying  and  hand- 
ling. In  many  economic  processes,  this  division  o^  function 
is  carried  to  such  an  extreme  that  the  imagination  and 
thought  of  labor  is  not  only  unnecessary  but  is  apt  to  in- 
terfere with  the  efficient  operation  of  the  machine.  In 
other  processes,  the  mental  tax  upon  the  laborer  is  still 
considerable,  but  even  in  these  cases,  the  broader,  the  more 
fundamental  features  of  the  science  of  production  are  de- 
signed and  laid  down  for  him  by  engineers  and  managers. 

The  mechanical  processes  which  labor  carries  through 
involve  endless  repetition.  The  operation  of  the  automa- 
tic machine  requires  that  the  laborer  shall  touch  the  same 
lever  in  the  same  way,  at  the  same  speed,  several  thousand 
times  per  day.  Where  the  machinery  has  not  become  com- 
pletely automatic,  the  repetitive  motions  which  the  laborer 
performs  are  the  chief  features  of  his  part  of  the  oper- 
ation. The  inevitable  consequence  of  repetition  is  monot- 
ony. The  incessant  performance  of  the  same  motion  day 
in  and  day  out,  thousands  and  tens  of  thousands  of  times, 
leaves  scant  room  for  variety,  newness,  imagination,  or 
originality.  The  work  becomes  irksome,  fatiguing,  unin- 
teresting, monotonous,  ^ 

1  See  S.  H.  Slichter,  "The  Txirnover  of  Factory  Labor,"  pp.  188- 
191. 


Labor:  Its  Part  in  Production  101 

This  depressing  monotony  is  not,  however,  the  outcome 
of  all  automatic  inventions.  The  best  cure  for  monotony 
and  dullness  is  often  not  less  machinery  but  more  machin- 
ery. The  processes  of  production  which  involve  great  mus- 
cular exertion  under  high  temperature,  or  in  an  atmosphere 
saturated  with  obnoxious  gases,  can  be  reduced  to  auto- 
matic treatment  with  great  advantage  to  the  laborer.  A 
careful  investigation  of  steel  manufacturing  processes  has 
shown  that,  formerly,  men  were  on  the  twelve-hour  day, 
but  worked  only  six  or  seven  hours  of  that  period.  During 
the  remainder  of  the  period  the  workers  were  w^aiting  for 
various  processes  to  be  finished.  Now,  with  machinery  and 
science  in  control  of  the  blast  furnaces  and  the  conveying 
operations,  the  hard,  gruelling  labor  is  reduced  to  a  mini- 
mum and  men  are  responsible  for  watching  and  guiding, 
by  the  manipulation  of  levers  and  the  pushing  of  electric 
buttons,  vast  and  important  processes  in  the  making  of 
steel.  The  observations  of  T.  N.  Carver  led  to  the  con- 
clusion that  the  automatic  machinery  for  the  manufacture 
of  shoes  imposes  less  monotony  and  drudgeiy  upon  the  ma- 
chine operative  than  was  formerly  experienced  by  the  old- 
fashioned  cobbler  laboriously  making  a  single  pair  of  shoes. 
With  adequate  regard  for  such  facts,  it  remains  true, 
however,  that  the  general  consequence  of  the  automatic 
mechanical  principle  has  been  a  marked  increase  in  monot- 
ony for  laborers. 

Much  of  the  mechanical  process  when  carried  on  auto- 
matically makes  unnecessary  a  high  degree  of  skill  or  in- 
genuity on  the  part  of  the  operative.  The  wide  studies  of 
R.  F,  Hoxie  disclosed  that  "the  workman  no  longer  knows 
his  trade  as  he  did  under  the  handicraft  system.  Modern 
capitalistic  and  machine  industry  has  progressively  special- 
ized him  .  .  .  till  now  the  average  workman  knows  only 
one  or  a  few  minute  processes  connected  with  any  enter- 
prise and  has  no  means  of  broadening  his  knowledge." 
In  cases  where  this  tendency  reaches  its  more  extreme  de- 
velopment, the  worker's  duty  in  standing  at  the  machine 
is  so  simplified  that  even  the  most  ignorant  workers  can- 
not err.    Such  machines  are  termed  "fool  proof."    Recog- 


102  Labor:  Its  Part  in  Production 

nizing  this  fact,  some  scientific  managers  have  claimed  that 
many  operations  can  be  performed  most  efficiently  by 
workers  who  in  their  temperament  and  intelligence  most 
nearly  resemble  the  ox  or  the  guerilla.  It  has  been  found 
that  for  many  processes  the  mentally  dull, — even  the  men- 
tally deficient — are  the  best  operatives.  It  has  been 
estimated  that  perhaps  fully  one-half  of  the  industrial  proc- 
esses can  be  carried  through  effectively  by  those  who  have 
had  no  vocational  training.  The  human  consequences  are 
suggested  by  C.  H.  Cooley  as  follows:  "Men,  women, 
children  find  themselves  required  to  work  at  tasks,  usually 
tininteresting  and  often  exhausting,  amidst  dreary  sur- 
roundings, and  under  such  relations  to  the  work  as  a  whole 
that  their  imagination  and  loyalty  are  little,  if  at  all, 
aroused.  Such  a  life  either  atrophies  the  larger  impulses  of 
human  nature  or  represses  them  to  such  a  degree  that  they 
break  out  from  time  to  time  in  gross  and  degrading  forms 
of  expression." 

Out  of  this  situation  has  developed  a  tendency  for 
American  workmen  to  avoid  wherever  possible  the  un- 
skilled, untrained,  ignorant  functions.  These  have  come 
more  and  more  to  be  assumed  by  immigrant  workers.  A 
line  of  cleavage  has  grown  up,  roughly  and  approximately 
speaking,  between  American  skilled  workmen  and  immi- 
grant unskilled  workmen.  A  class  feeling  has  grown  up 
between  the  two  groups.  The  skilled  workman  looks  with  a 
certain  amount  of  condescension  upon  the  lower  ranks  of 
common  unskilled  labor.  The  skilled  worker  is  proud  of 
the  fact  that  he  is  not  on  the  low  plane  which  requires  no 
distinct  amount  of  mental  capacity.  As  Hoxie  explains, 
"The  skilled  workers  in  general  have  no  love  for  the  un- 
skilled; the  successful  for  the  unsuccessful." 

The  function  of  labor  is  for  the  most  part  being  per- 
formed very  greatly  to  the  dissatisfaction  of  the  managers 
of  industry.  Productive  efficiency  is  frequently  only  a 
fraction  of  its  possibilities.  The  workers  lack  interest,  lack 
enthusiasm,  and  in  consequence  often  not  only  are  indif- 
ferent to  the  efficiency  of  production,  but  deliberately 
soldier  on  the  job.    One  great  problem  of  production  at  the 


Labor:  Its  Part  in  Production  103 

present  time  is  to  enlist  the  constructive  instincts  of  labor- 
ers in  their  work.  This  outstanding  problem  of  production 
is  not  the  invention  of  new  machines  but  the  invention 
of  new  ways  and  means  for  drawing  out  the  creative  inter- 
est of  the  workers.  Without  such  a  creative  interest,  pro- 
duction is  predestined  to  remain  at  absurdly  low  levels. 

A  wide  variety  of  devices  are  being  resorted  to  by  pro- 
gressive managers  as  a  means  of  arousing  the  instinct  of 
workmanship.  Inventors  are  being  called  upon  to  take 
into  account  the  human  factor  in  the  construction  of  new 
machinery.  Engineers  are  giving  attention  to  methods  of 
organizing  the  production  processes  which  will  harmonize 
with  the  interest  of  the  workers.  When  laborers  are  found 
to  "go  stale"  at  certain  machines,  or  to  suffer  excessive 
depression  or  fatigue,  they  are  moved  around  the  plant 
to  machines  of  different  types  in  order  to  have  variety. 
Progress  charts  are  posted  in  order  to  give  the  laborers 
a  clear  picture  of  the  amount  of  work  which  each  man  is 
doing  in  comparison  with  his  fellow  laborers,  also  to  give 
each  man  a  chance  to  compare  his  output  to-day  with  that 
of  the  year  previous.  Managers  in  progressive  plants  call 
for  suggestions  from  the  workers  about  economy,  better 
arrangement  of  machines,  new  inventions,  and  desirable 
working  conditions.  Joint  conferences  are  held  to  discuss 
with  the  laborers  policies  for  the  improvement  of  workman- 
ship and  means  for  inspiring  creative  interest  in  the  shop. 
A  pride  in  work  is  secured  by  placing  emphasis  upon  the 
quality  of  the  output  rather  than  upon  the  quantity  alone. 
Kivalry  between  individual  workers,  between  gangs,  and  be- 
tween whole  departments  of  the  plant  is  employed  to 
stimulate  the  imagination  and  enthusiasm  of  the  workers. 
All  in  all,  the  end  and  aim  is  to  put  into  the  worker's  life 
a  content  of  thinking,  planning,  suggesting  and  under- 
standing. 

The  last  thirty  years  has  witnessed  a  remarkable  de- 
velopment of  mechanical  invention  and  of  the  application  of 
science  to  economic  methods.  In  the  course  of  this  develop- 
ment a  point  has  been  reached  at  which  the  human  nature 
of  the  workers  finds  it  difficult  to  make  an  efficient  adapta- 


104  Labor:  Ita  Part  m  Production 

tion  to  the  economic  process.  Regardless  of  what  outside 
inventors  and  scientists  have  sometimes  considered  labor 
ought  to  do,  his  bundle  of  instinctive  tendencies  has  made 
him  the  human  being  that  he  is,  often  unreasonable,  often 
unmechanical  and  unautomatic,  often  brilliant,  often  child- 
ish, often  uncontrollable.  The  question,  How  much  will 
a  worker  produce  ?  is  met  by  the  apt  remark,  As  much  as  he 
wants  to.  Economic  science  faces  the  task  of  leading  and 
inspiring,  not  driving  and  threatening  labor.  There  is 
already  sufficient  experience  to  indicate  that  this  problem 
is  not  a  matter  of  mawkish  sentimentalism  or  Utopian 
dreaming  but  is  a  practical  possibility  of  human  engineer- 
ing. It  means  putting  man  and  all  of  his  instinctive  ten- 
dencies at  the  beginning  and  end  of  thought  about  the 
laborer's  part  in  production,  and  it  necessitates  readjusting 
machine  and  management  to  fit  the  human  nature  of  the 
workman. 

The  Job 

Labor's  opportunity  to  carry  out  its  part  in  production 
constitutes  the  job.  The  opportunity  to  work  and  thereby 
to  earn  a  living  is  indispensable  to  the  laborer's  life.  In  its 
present  form  the  job  is  an  opportunity  which  may  be  given 
to  the  laborer  or  taken  away  by  powers  utterly  beyond  his 
control.  The  laborer  has  no  right  to  a  job.  There  is  no 
established  legal  responsibility  on  the  part  of  anybody  to 
guarantee  the  laborer  a  steady  job.  The  employer  may  give 
or  withhold  as  he  sees  fit.  The  employer  retains  the  right 
to  hire  and  fire  for  reasons  good  and  sufficient  in  his 
own  eyes.  The  opportunity  to  carry  out  labor's  function  is 
therefore  a  precarious  one,  and  is  created  or  destroyed  by 
powers  of  management  above  and  beyond  his  influence  or 
control. 

To  lose  his  job  is  likely  to  bring  distress  and  fear  to  the 
worker  and  his  family.  Both  he  and  his  dependents  face 
the  demands  of  the  landlord,  starvation,  and  the  keenest  of 
social  dreads  and  anxieties  until  a  new  job  can  be  found. 
This  may  take  weeks  or  months.  In  the  meantime  the 
state  of  mind  and  body  of  the  worker  tends  toward  de- 


Labor:  Its  Part  in  Production  105 

moralization.  As  stated  in  detail  by  Lescohier,  unsteady 
employment  "undermines  his  physique;  deadens  his  mind; 
weakens  his  ambition ;  destroys  his  capacity  for  continuous, 
sustained  endeavor;  induces  a  liking  for  idleness  and  self- 
indulgence;  saps  self-respect  and  the  sense  of  responsi- 
bility; impairs  technical  skill;  weakens  nerve  and  will 
power ;  creates  a  tendency  to  blame  others  for  his  failures ; 
saps  his  courage;  prevents  thrift  and  hope  of  family  ad- 
vancement; destroys  a  workman's  feeling  that  he  is  tak- 
ing good  care  of  his  family;  sends  him  to  work  worried 
and  underfed ;  plunges  him  in  debt. ' '  ^ 

The  loss  of  a  job  may  be  the  fault  of  the  worker  himself, 
or  on  the  other  hand,  may  arise  from  causes  completely 
beyond  his  control.  In  the  average  industry,  approxi- 
mately one-half  of  the  causes  of  a  change  of  employment 
lie  within  the  volition  of  the  worker  himself.  Among  such 
causes  for  the  laborer 's  voluntarily  leaving  his  job  are  fits 
of  temper,  mean  and  disagreeable  foremen,  unsatisfactory 
wages,  excessive  hours,  no  prospect  of  advancement,  the 
wanderlust,  bad  housing  accommodations,  poor  health, 
and  attractive  opportunities  elsewhere.  The  other  half 
of  the  changes  of  employment  are  due  to  the  volition  of 
the  employer.  Of  this  half  the  larger  proportion  of  changes 
are  in  the  form  of  lay-offs  due  to  industrial  depression, 
seasonal  shut-downs,  bankruptcy,  new  mechanical  inven- 
tions. The  smaller  proportion  are  in  the  form  of  dis- 
charges due  to  inefficiency,  unreliability,  insubordination, 
agitation,  union  affiliation,  etc.  The  causes  for  the  worker's 
withdrawing  from  a  job,  or  for  his  being  dropped  from  a 
company  payroll  are  obviously  in  a  very  large  measure 
pr,j^chological.  Dissatisfaction,  temperament,  instinctive 
ambitions,  and  all  the  moods  and  impulses  of  both  worker 
and  employer  enter  into  the  unsteadiness  of  work.  "With 
surprising  frequency,  the  shift  of  employment  has  no  trace- 
able connection  with  careful;  deliberate,  rational  calcula- 
tion but  is  due  to  outbursts  of  instinctive  passions,  or  to  the 
domination  of  fixed  prejudices.  In  many  cases  the  work- 
er's quitting  of  the  job  is  an  act  without  foresight,  or  re- 
i"The  Labor  Market,"  p.  107. 


106  Labor:  Ith-  Part  in  Production 

gard  for  distressing  consequences  to  follow.  There  is  a 
large  group  of  workers  whose  mental  equipment  does  not 
enable  them  to  protect  themselves  from  the  rashness  of 
blind  quitting.  As  pointed  out  by  Dr.  H.  M.  Adler,  ' '  There 
are  individuals  in  a  community  who  for  a  variety  of  rea- 
sons are  not  able  to  regulate  their  conduct  on  the  basis  of 
experience." 

The  amount  of  turnover  of  labor  varies  greatly  from  com- 
pany to  company,  but  in  the  aggregate  attains  alarm- 
ing proportions.  It  has  been  estimated  that  on  an  average, 
in  order  to  maintain  1,000  constantly  at  work  it  is 
customary  to  employ  one  thousand  new  men  during  the 
year  to  replace  1,000  old  ones.  In  other  words,  the  aver- 
age rate  of  turnover  is  about  100  per  cent.  However 
there  are  some  plants  in  which  the  turnover  runs  as  low 
as  10  to  20  per  cent,  and  others  in  which  it  ranges  from  300 
to  600  per  cent.  Taking  industry  as  a  whole,  government 
investigations  form  the  basis  for  the  estimate  that  to  keep 
five  million  workers  fully  employed  throughout  the  year 
1914,  there  were  about  four  million  accessions  and  four 
and  a  half  million  separations,  or  a  total  of  more  than  eight 
million  workers  changing  jobs  that  year. 

A  true  picture  of  employment,  therefore,  presents  a 
stream  of  constant  come  and  go,  incessant  hiring  and  firing. 
This  extreme  flux  and  change  affects  most  severely  about 
one-half  the  workers.  The  other  half  endeavors  to  stick 
to  the  job.  For  the  latter  employment  is  something  steady 
and  permanent.  They  stay  with  the  same  company  for  as 
large  a  portion  of  their  lifetime  as  economic  conditions 
will  permit.  The  high  rate  of  turnover  occurs  because  of 
the  extreme  fluctuations  occurring  among  the  other  half  of 
the  workers.  For  them  a  job  is  an  affair  of  a  few  weeks 
or  a  few  months.  Due  to  their  own  unfitness  they  are 
fired,  or  due  to  their  discontent  at  conditions  within  the 
plant  the  job  becomes  irksome  almost  as  soon  as  it  is  taken. 
This  half  of  the  laboring  population  is  on  the  march  from 
plant  to  plant  a  large  share  of  the  time.  For  them  em- 
ployment is  an  unstable,  uncertain,  fickle,  temporary  af- 
filiation. 


Labor:  Its  Part  in  Production  107 

The  cost  of  labor  turnover  is  immense.  The  cost  to  the 
employer  in  terms  of  dollars  and  cents  ranges  from  $25  to 
$200  or  more  per  employee.  For  employees  the  loss  of 
earnings  during  unemployment,  the  expense  and  difficulty 
of  obtaining  new  jobs,  the  low  wages  while  learning  a 
new  job,  the  greater  exposure  to  accident  in  unfamiliar 
work,  the  cost  of  moving  the  worker's  family,  the  loss  of 
skill  by  the  shift  of  occupation,  and  the  demoralization 
and  discouragement  from  idleness  are  tremendous. 

Attempts  to  reduce  labor  turnover  have  been  frequent 
during  the  last  decade.  It  was  formerly  supposed  that  the 
ready  mobility  of  labor  was  thoroughly  useful  because  it 
evened  up  the  supply  and  demand  of  workers  in  various 
communities  and  served  to  adjust  the  labor  market  to 
business  requirements  the  country  over.  In  recent  years, 
however,  this  mobility  of  labor  has  come  to  be  looked 
upon  as  an  undesirable  burden  to  both  the  employer  and 
the  employee.  At  first,  employers  sought  to  reduce  turn- 
over by  special  devices  contrived  almost  exclusively  with 
eyes  centered  upon  the  turnover  problem.  Gradually  this 
viewpoint  has  been  abandoned  and  in  its  place  has  arisen 
the  belief  that  turnover  is  an  index  of  the  whole  policy  of 
labor  management  of  the  corporation.  No  single  trick  or 
device  has  magic  powers  to  reduce  turnover.  All  phases  of 
the  corporation  policy  need  to  be  placed  upon  a  sound 
footing,  and  thereafter  turnover  will  take  care  of  itself. 
There  are  certain  phases  of  corporation  policy  which  have 
more  importance  in  reducing  turnover  than  others.  To 
quote  Slichter,  "The  foremost  important  features  of  a  job 
to  the  average  factory  workman  are : 

1.  The  wages. 

2.  Its  steadiness. 

3.  Its  psychical  and  nervous  demands  upon  him. 

4.  The  hours. 

As  these  four  overshadow  all  other  features  of  the  job 
in  importance  to  the  workman,  making  the  work  attractive 
in  these  four  respects  must  necessarily  form  the  founda- 
tion of  attempts  to  reduce  the  turnover.  .  .  .  Men  will  not 


108  Labor:  Its  Part  in  Production 

remain  at  work  hecause  of  incidental  attractions  when 
matters  of  fundamental  importance  are  unsatisfactory."  ^ 
Under  favorable  conditions  turnover  can  be  reduced,  so 
most  authorities  agree,  to  approximately  a  20  per  cent, 
basis.^ 

The  unsteadiness  of  the  job  has  the  most  intimate  bear- 
ing upon  industrial  morale  and  upon  the  degree  of  loyalty 
existing  between  the  employer  and  the  employee.  Unsteadi- 
ness of  employment  operates  as  a  direct  cause  of  disloyalty 
to  the  company.  The  worker  feels  that  wages,  hours,  and 
working  conditions  are  so  unsatisfactory  that  he  is  ready 
at  any  moment  to  leave  the  job.  If  he  does  not  leave  on 
his  own  accord  a  foreman  or  superintendent  may  fire  him 
for  reasons  good  or  bad.  Under  these  conditions  he  be- 
comes the  victim  of  a  weak,  and  often  vicious  industrial 
morale.  It  is  next  to  impossible  to  feel  loyal  to  the  com- 
pany because  he  receives  too  many  indications  that  the  em- 
ployer feels  no  sense  of  loyalty  to  him.  The  employer 
stands  ready  to  close  down  his  factory  when  business  con- 
ditions are  poor  regardless  of  the  discomfiture  among  his 
workers,  and  with  that  understanding  in  the  worker's 
mind,  it  is  but  natural  for  his  instinctive  tendencies  to 
react  in  terms  of  resentment. 

Among  a  very  large  group  of  employers,  this  state  of  un- 
certainty and  unsteadiness  of  employment  is  looked  upon 
as  a  valuable  weapon  over  the  employeOvS.  If  the  worker  can 
be  kept  in  a  state  of  fear  and  dread  of  being  fired,  it  is 
thought  that  he  will  be  spurred  to  efficiency  and  obedience. 
The  right  of  firing,  with  loss  of  pay,  is  supposed  to  be  es- 
sential in  order  that  men  may  have  an  incentive  to  work 
thoroughly.  The  knowledge  that  a  line  of  applicants  is 
standing  at  the  factory  gate  eagerly  asking  for  jobs  is  con- 
ceived as  an  intimidating  force.  The  discipline  of  fear  is 
hung  over  the  workers'  heads.  The  attempt  to  appeal  to 
the  emotions  of  fear  and  to  establish  industrial  discipline 
upon  the  instinctive  tendencies  which  connect  themselves 
with  worry,   anxiety,  privation  and   distress  is,  however, 

i"The  Turnover  of  Factory  Labor,"  p.  251. 
2  Lescohier,  "The  Labor  Market,"  p.   116. 


Labor:  Its  Part  in  Production  109 

definitely  repudiated  by  the  more  progressive  business  men. 
Fear  may  drive  men  to  work,  but  work  done  under  such 
compulsion  has  neither  the  spirit  nor  the  efficiency  which 
is  possible  of  realization  when  other  motives  are  brought 
out.  As  Cooley  remarks,  * '  Fear  is  a  poor  motive,  because  it 
does  not  evoke  those  energies  which  are  bound  up  with  am- 
bition, sympathy,  social  imagination  and  hope."  To  quote 
F.  J.  Miller  in  a  presidential  address  to  the  American 
Society  of  Mechanical  Engineers,  "The  old  driver  method 
of  management  will  no  longer  do.  .  .  .  The  workers  of 
every  country  have  acquired  a  new  status.  Realizing  the 
great  difference  between  a  body  of  emploj'ees  all  enthusias- 
tically co-operating,  and  a  body  of  employees  rendering 
only  such  service  as  they  think  necessary  to  hold  their  jobs, 
these  men  [engineers]  are  giving  this  problem  their  best 
attention. ' ' 

The  fear  discipline  holds  the  mass  of  workers  to  a  low 
margin  of  safety.  At  any  minute  they  are  in  danger  of 
losing  the  opportunity  to  work,  and  with  that  they  lose 
the  opportunity  to  livelihood  and  safety.  This  condition 
maintains  what  has  been  called  "a  pain  and  deficit 
economy,"  that  is,  an  economy  in  which  the  worker  is 
always  on  the  verge  of  unemployment  and  privation.  The 
never-ending  uncertainty  under  the  fear  regime  brings  a 
heavy  human  cost.  It  means  that  workers  have  at  pain- 
fully frequent  intervals  to  ''turn  to  new  occupations,  form 
new  habits,  and  think  new  thoughts."  As  Cooley  finds, 
"the  principle  that  human  character  deteriorates  under 
irregular  and  uncertain  employment  is  an  old  one  and,  I 
believe,  undisputed."^ 

In  the  job  is  wrapped  up  all  that  means  most  in  the  life 
of  the  working  man.  It  is  his  opportunity  to  be  a  useful 
member  of  society.  It  is  his  opportunity  to  carry  out  the 
instinctive  and  mental  energies  which  make  him  a  human 
being.  For  him  it  contains  the  means  to  all  that  life  holds 
worth  while.  It  is,  in  short,  for  the  worker  the  very  life 
of  life.  The  fear  discipline  which  is  associated  with  un- 
restricted right  to  hire  and  fire  and  with  irresponsible 
1  Cooley,  "Social  Process,"  p.  184. 


110  Labor:  Its  Part  in  Production 

power  to  intimidate  and  coerce  men  by  threats  of  unem- 
ployment strikes  at  the  heart  of  the  worker's  life.  Pro- 
gressive employers  have  discovered  that  the  fear  discipline 
can  be  moderated  with  immense  human  gain  to  the  work- 
ers and  with  a  corresponding  benefit  to  the  employers  in 
terms  of  productive  efficiency  and  sound  industrial  morale. 

Hours  of  Work 

The  hours  of  work  are  affected  by  two  primary  economic 
factors:  first,  hours  should  not  exceed  the  maximum  con- 
sistent with  the  health  and  welfare  of  the  workers ;  second, 
within  this  limitation,  hours  should  not  fall  below  the 
minimum  consistent  with  high  production.  The  first  factor 
is  chiefly  a  question  of  the  length  of  time  a  worker  can 
stay  at  his  task  without  suffering  injurious  fatigue,  and, 
at  the  same  time,  of  the  length  of  working  day  which  will 
allow  him  enough  leisure  to  take  advantage  of  the  en- 
joyments and  recreations  and  duties  of  a  wholesome  life. 
It  is  a  human  factor  pure  and  simple.  The  second  factor 
is  chiefly  a  question  of  securing  the  length  of  work  day 
which  will  maintain  the  worker  in  sufficient  health  and 
morale  to  make  possible  a  maximum  of  efficiency  in  pro- 
duction. 

The  exact  prevalence  of  the  eight  hour  day  is  not  known, 
but  that  it  has  had  a  steady  and  rapid  growth  during  the 
last  five  or  ten  years  is  beyond  question.  It  seems  clear 
that  in  spite  of  the  rapid  spread  of  the  movement,  a  ma- 
jority of  American  wage  earners  are  still  outside  the  scope 
of  the  eight  hour  limit.  From  1915  to  1919,  the  number 
of  workers  newly  brought  within  the  scope  of  the  eight 
hour  day  was  approximately  three  and  one-half  millions. 
During  the  war  and  after,  the  authority  of  governmental 
boards  and  commissions,  both  state  and  federal,  and  the 
approval  of  the  President  of  the  country  was  given  to  the 
principle  of  the  eight  hour  day  for  most  industries.  This 
amounts  ordinarily  to  the  forty-eight  hour  week. 

The  principle  is  to  be  conceived  as  a  flexible  one.  The 
length  of  day  for  each  industry  is  a  matter  for  scientific 
determination  in  that  industry.     A  careful  scientific  study 


Labor:  Its  Part  in  Production  111 

of  fatigue,  monotony,  productive  efficiency  and  other  re- 
lated factors  is  necessary  to  determine  in  any  specific  in- 
dustry the  most  effective  length  of  working  day  and  week. 
Even  though  the  normal  for  most  industries  has  been  ap- 
proved as  the  forty-eight  hour  week,  nevertheless  there  are 
others  in  Avhich  the  forty-four  hour  week  has  been  found 
better,  and  still  others  in  which  a  fifty-four  hour  week  has 
been  found  the  most  advantageous. 

The  scientific  determination  of  the  length  of  work  day 
for  each  industry  requires  also  the  consideration  of  over- 
time. Not  infrequently  the  eight  hour  base  is  set  as  a 
standard  from  which  to  figure  wages,  whereas  the  actual 
length  of  work  day  involves  overtime  at  extra  pay.  Such 
a  situation  has  prevailed  on  many  railroads,  at  the  wish 
of  the  workers  themselves,  because  of  the  extra  earn- 
ings made  possible  for  them.  In  frequent  cases  the  over- 
time is  exacted  by  the  employer  against  the  wishes  of  the 
workers,  because  of  his  desire  thereby  to  increase  output 
for  the  time  being.  The  whole  problem  of  overtime  is  a 
proper  matter  for  scientific  determination  within  each  in- 
dustry. It  is  a  problem  which  deserves  treatment  by  other 
means  than  guesswork  or  the  whims  or  prejudices  of  either 
employer  or  employee. 

The  steel  industry  has  been  one  of  the  most  offending  in- 
dustries in  resisting  a  reduced  working  day.  However, 
a  number  of  individual  plants  have  eliminated  the  12  or 
14  hour  day  with  its  frequent  shift  necessitating  24  hours 
of  continuous  labor,  and  their  action  has  proved  the 
shortening  of  hours  practicable  from  a  production  stand- 
point. Under  the  new  schedule,  the  three  shift  system, 
of  eight  hours  each,  has  been  tried  out  successfully.  The 
largest  steel  company,  the  United  States  Steel  Corpora- 
tion, announced  in  1921  its  approval  of  the  reduced  hours 
policy  and  its  determination  to  put  the  new  policy  into 
effect.  For  other  industries  problems  of  night  work,  of 
the  seven  day  week  and  of  the  hours  of  women  and  children 
remain  to  be  settled  by  the  same  method  of  scientific 
analysis. 

Long  working  hours  have  been  objectionable  because  of 


112  Labor:  Its  Part  in  Production 

their  harmful  effects  upon  the  mental  and  physical  health 
of  the  worker.  Long  hours  under  modern  conditions  of 
production  generally  result  in  injurious  fatigue,  "The 
problem  of  hours  has  undergone  a  fundamental  change 
through  the  introduction  of  large  scale  factory  production 
and  the  gro^Ying  concentration  of  our  population  in  cities. 
Men  and  women  can  \\'ork  relatively  long  hours  at  work 
which  is  interesting,  which  calls  upon  their  various  ener- 
gies, which  gives  some  opportunity  for  creative  self-expres- 
sion. "Work  which  is  repetitive,  monotonous  and  con- 
ducted under  the  confining  indoor  conditions  of  even  the 
best  industrial  plant,  especially  where  the  plant  is  located 
at  a  distance  from  the  homes  of  the  workers,  makes  much 
more  exacting  physical  and  nervous  demands. ' '  ^  The  pro- 
ductive process  imposes  upon  the  delicate,  nervous  and 
physical  mechanism  of  the  human  operator  a  speed  of 
motion,  a  monotony  of  operation,  a  distraction  of  noise,  an 
imminence  of  industrial  accident,  a  fear  of  bosses  and  a 
lack  of  interest,  all  of  which  accelerate  the  accumulation  of 
waste  products  in  the  body,  the  exhaustion  of  vital  energy, 
the  straining  of  the  nervous  organism  and  the  tension  of 
the  mental  powers. 

Tests  applied  to  many  industries  have  demonstrated 
that  fatigue  is  a  cause  of  increased  accidents.  The  dullness 
of  mind,  the  tiredness  of  nerve,  destroys  the  alertness  and 
quickness  of  reaction  which  is  necessary  for  a  "safety 
first"  operation  of  many  types  of  machines.^  Moreover 
fatigue  makes  the  worker  excessively  liable  to  nervous 
breakdown,  to  morbidity  and  moodiness,  and  predisposes 
his  bodily  constitution  to  an  easy  contraction  of  serious 
diseases. 

In  addition,  fatigue  brings  the  worker  to  such  a  de- 
pressed physical  and  mental  state  that  it  is  difficult  for 
him  to  enjoy  the  leisure  hours  at  the  end  of  the  day's  toil. 
"When  he  is  too  tired  to  play,  too  deadened  to  read,  too 
fagged  out  to  benefit  from  recreation,  his  leisure  hours  lose 
a   large   part   of   the   value   which    they    should    contain. 

1  President's  Second  Industrial  Conference  Report,  1920. 

2  See  Goldmark,  "Fatigue  and  Efficiency." 


Labor:  Its  Part  in  Production  113 

Fatigue  unfits  the  worker  to  enjoy  leisure  and  to  do  justice 
to  his  responsibilities  of  citizenship. 

The  comment  of  Dr.  F.  S.  Lee  carefully  appraises  the 
experience  of  recent  years.  He  declares,  "If  a  man  is 
worked  beyond  his  physiological  limit,  he  is  incapacitated 
for  his  duties  to  his  family  and  to  society.  The  history  of 
labor  has  demonstrated  this  abundantly,  and  the  experi- 
ence of  reducing  the  hours  of  labor  has  almost  universally 
been  followed  by  marked  moral  and  social  improvement, 
such  as  is  shown  by  decrease  in  intemperance  and  crime, 
improvement  in  living  conditions,  greater  efforts  toward 
education,  greater  intelligence  and  greater  industrial  ef- 
ficiency— all  this  in  contradiction,  not  only  to  the  vivid 
predictions  of  disaster  pronounced  by  active  and  un- 
principled opponents  of  the  change,  but  to  the  fears  of  those 
who  were  well  meaning  but  timid.  "^ 

The  effect  of  fatigue  upon  productive  efficiency  is  to  di- 
minish it.  The  British  Health  of  Munition  Workers  Com- 
mittee found  that  for  women  engaged  in  certain  forms  of 
lathe  work  a  "fifty  hour  week  yields  as  good  an  out- 
put as  a  sixty-six  hour  week  and  a  considerable  better  one 
than  a  seventy-five  hour  week."^  Investigations  of  cotton 
manufacturing  indicate  that  between  fifty  and  fifty-six 
hours  per  week  secure  the  maximum  efficiency  in  that  in- 
dustry. The  most  productive  length  of  working  day  is 
therefore  a  matter  of  scientific  ascertainment.  In  some  in- 
dustries the  54-hour  week  has  evoked  maximum  produc- 
tion; in  others,  the  44-hour  week.^  The  twelve  hour  day 
has,  practically  without  exception,  been  found  subversive 
of  maximum  production.  Insistence  mast  be  made  that 
not  guesswork,  nor  sentiment,  is  adequate  to  decide  for  any 
particular  branch  of  work  what  is  the  most  effective  work- 
ing period.  Scientific  measurement  is  the  only  adequate 
means  of  finding  the  proper  period. 

''■Science,  44:733.  Also  see  Goldmark,  "Fatigue  and  Efficiency," 
pp.  279-283. 

2  "Ministry  of  Munitions,  Healtli  of  Munitions  Workers  Committee, 
1918,"  p.  35. 

3  See  Brooks,  "Labor  and  the  New  Social  Order,"  p.  250.  Also 
Goldmark,  "Fatigue  and  Efficiency,"  p.   174. 


114  Labor:  Its  Part  in  Production 

The  relation  between  shortened  hours  and  increased  ef- 
ficiency is  summarized  by  H.  B.  Drury,  after  a  careful 
study  of  the  experience  of  several  American  steel  com- 
panies on  long  and  short  work  periods.  His  conclusion  is, 
*'The  mere  change  from  twelve  to  eight  hours  in  an  indus- 
try where  everything  centers  around  huge  machines  and 
furnaces  is  simply  an  opening  of  the  door  for  greater 
efficiency,  not  a  consummation  of  it.  "What  is  necessary  if 
the  industry  is  really  to  get  what  it  should  out  of  the 
shorter  day  is  a  thorough-going  reorganization.  The  occu- 
pation must  be  changed,  the  spirit  of  the  men,  the  type 
of  foremen.  "What  the  introduction  of  the  three  shift 
system  does  is  simply  to  open  up  a  new  country.  .  .  . 
But  to  harness  this  new  energy,  as  to  develop  a  new  coun- 
try, will  take  time." 

The  progress  of  fatigue  elimination  has  come  about  by 
a  number  of  different  avenues.  The  pressure  of  labor 
unions  for  the  eight-hour  day  by  collective  bargaining  was 
the  original  stimulus  behind  the  movement.  State  legis- 
lation has  fixed  hour  limits  for  women  and  children  very 
widely,  but  only  in  comparatively  few  cases  for  men.  The 
eight-hour  day  was  determined  for  the  railroads  by  Con- 
gressional statute  in  1916  and  in  1921  more  definitely 
applied  by  the  Federal  Railroad  Labor  Board.  The  ex- 
treme hazards  of  the  mining  industries  have  led  most  oi 
the  states  in  which  mining  is  an  important  industry  to 
limit  working  hours  to  eight  in  one  day.  In  a  number  of 
cases  the  voluntary  action  of  the  employer  has  led  to  the 
reduced  length  of  working  day.  Scientific  management 
and  personnel  administration  has  given  valuable  study  to 
the  problem  and  much  encouragement  to  the  movement. 
At  the  same  time,  rest  periods  have  been  interspersed  in 
the  day's  work  as  a  means  of  preventing  undue  fatigue 
and  maintaining  maximum  efficiency.  The  adequate 
length  of  meal  times,  the  regulation  of  night  work,  the 
granting  of  Saturday  half-holidays  and  of  legal  holidays, 
the  allowance  of  one  day's  rest  in  seven,  and  the  assurance 
of  annual  vacations  have  all  come  into  being  in  a  great 
many  industries  under  the  stimulus  of  the  same  agencies  as 


Labor:  Its  Part  in  Production  115 

brought  about  the  reduction  of  the  length  of  the  working 
day.^ 

Of  course,  the  mere  fact  that  the  worker  is  granted 
more  leisure  does  not  insure  that  he  will  make  wise  use 
of  it.  As  a  matter  of  fact,  an  alarming  proportion  of  the 
people  who  have  received  the  opportunities  that  go  with 
more  leisure  have  made  abominable  use  of  the  opportuni- 
ties. During  leisure  hours,  the  worker  is  a  consumer,  and 
the  art  of  consuming  wisely  has  not  been  properly  de- 
veloped in  economic  society.  The  education  of  consumers 
to  a  wholesome  use  of  leisure  time,  and  to  a  proper  stand- 
ard of  spending  income  is  imperative,  if  the  shortening 
of  the  work  day  is  to  be  a  safe  social  achievement.  This 
matter  is  treated  more  in  detail  in  later  pages. 

The  net  outcome  of  the  whole  movement  may  be  stated 
in  terms  of  a  reduction  of  the  human  cost  of  industry 
without  a  reduction  in  productive  efficiency.  J.  A.  Hob- 
son  writes,  "The  first  plea  for  a  shorter  work  day  is  one 
which  our  analysis  has  made  self-evident.  It  will  greatly 
reduce  the  human  cost  of  production  in  most  processes. 
For,  as  we  recognize,  the  strain  of  muscular  and  nervous 
fatigue,  both  conscious  and  unconscious,  gathers  force  and 
grows  with  great  rapidity  during  the  later  hours  of  the 
work  day."  Less  fatigue  and  more  leisure  means  an  en- 
hanced amount  of  human  development.  It  means  an  op- 
portunity for  the  enjoyment  of  a  sound  family  life,  and  for 
the  development  instead  of  the  discouragement  of  per- 
sonality. It  means  a  higher  capacity  for  thought,  an  ex- 
pansion of  curiosity,  and  a  lifting  of  imagination.  To 
recognize  these  human  values  is  not  to  undermine  econo- 
mics with  vapid  sentimentalism.  An  economic  order  exists 
for  the  use  and  service  of  the  members  who  work  in  it, 
great  and  small,  wise  and  foolish.  Unless  it  serves  to  bring 
men  nearer  to  a  realization  of  their  best  selves,  it  is  dan- 
gerously defective.  It  must  be  positive  and  actually  have 
a  dynamic  urge  in  the  direction  of  less  exhaustion  and  more 

1  See  Commons  and  Andrews,  "Principles  of  Labor  Legislation," 
1920,  pp.  221-224,  and  Spaeth,  Industrial  Management,  February, 
1920,  p.  121. 


116  Labor:  Its  Part  in  Production 

exhilaration ;  it  must  not  be  negative  and  impose  undue 
hardships  which  tend  to  make  it  difficult  to  move  forward. 
When  this  idea  has  been  incorporated  in  the  technological 
organization  of  industry  it  has  generally  been  proved  that 
the  human  principle  is  at  the  same  time  the  true  efficiency 
principle.  Human  considerations  and  efficiency  considera- 
tions are  in  thorough  harmony.  A  redistribution  of  leis- 
ure, of  rest,  of  health,  of  imaginative  power,  of  social 
enjoyment  is  the  outcome  and  this  outcome  is  sound 
economics. 

Wages 

Labor's  reward  is  given  in  the  form  of  a  wage.  The 
wage  is  simply  a  money  payment  in  return  for  the  perform- 
ance of  labor's  function.  The  amount  of  this  payment  in 
terms  of  dollars  and  cents  is  the  nominal  wage;  the  pur- 
chasing power  of  this  payment  in  terms  of  food,  clothing, 
housing,  etc.,  is  the  real  wage.  Obviously  real  wages  are 
the  important  factor  from  labor's  standpoint  because  a 
high  wage  which  is  more  than  offset  by  high  prices  does 
not  mean  a  high  purchasing  power.  The  real  wage  arises 
from  the  ratio  between  the  price  paid  for  labor  and  the 
price  which  labor  in  turn  is  obliged  to  pay  for  all  the  neces- 
sities and  comforts  of  life. 

In  technical  calculations  and  in  engineering  plans,  labor 
is  of  necessity  measured  in  abstract  units,  under  such 
phrases  as  * '  per  man  hour, ' '  and  ' '  unit  labor  cost. ' '  From 
other  standpoints,  labor  is  not  an  abstract  conception  or  a 
theoretical  idea,  but  a  group  of  human  beings  with  human 
personalities  and  human  necessities.  Labor  is  capable  of 
hope  and  ambition,  pain  and  distress,  feelings  and  ideas. 
Moreover,  wages  themselves  in  the  real  sense  of  the  term 
are  not  an  abstract  sum.  They  represent  food  for  the 
satisfaction  of  human  hunger,  clothes  for  the  comfort  and 
gratification  of  the  human  body,  a  home,  children,  educa- 
tion. As  abstractions,  labor  and  wages  tend  to  lead  the 
mind  away  from  the  warm  and  human  realities  of  labor's 
part  in  production  and  it  is  necessary  to  fill  the  terms  with. 
a  genuine  human  content, 


Labor:  Its  Part  in  Production  117 

Economic  speculation  about  the  laws  of  wages  has 
evolved  various  theories,  each  stressing  some  particular 
factor  in  the  wide  range  of  forces  which  influence  the  final 
sum  going  to  labor.  One  notable  wage  theory  is  the  sub- 
sistence theory  emphasizing  the  so-called  iron  law  of  wages. 
The  essence  of  the  theory  is  that  wages  tend  to  reach  the 
lowest  level  upon  which  it  is  possible  for  labor  to  exist, 
and  that  any  effort  on  labor's  part  to  raise  wages  by  arti- 
ficial means,  such  as  union  organization,  is  balked  by  an 
iron  law  of  economics.  The  theory  does  not  take  fully  into 
account  the  fact  that  the  level  of  subsistence  is  capable  of 
being  raised  if  the  productive  efficiency  of  labor  can  be 
substantially  increased.  The  level  of  subsistence  has 
doubled  or  trebled  in  the  most  advanced  countries  during 
the  last  two  or  three  generations  because  machinery  and 
science  and  capital  have  multiplied  the  productive  effi- 
ciency of  the  average  worker.  Productive  efficiency  has 
increased  more  rapidly  than  has  population,  with  the  re- 
sult that  the  standard  of  living  and  the  standard  of  sub- 
sistence have  been  raised. 

Another  conspicuous  theory  is  the  wages  fund  theory  by 
which  certain  economists  teach  that  out  of  the  total  fund 
of  production  arbitrary  and  unchangeable  economic  laws 
lay  aside  a  certain  fund  of  wages  which  is  the  inevitable 
amount  available  as  labor's  share  in  production.  If  labor 
in  one  section  forces  wages  up,  the  artificial  excess  which 
is  thereby  squeezed  out  of  the  total  fund  means  that  labor 
in  another  section  will  have  its  wages  reduced  by  a  corre- 
sponding amount.  The  exact  and  strict  form  of  statement 
of  the  theory  is  too  narrow  to  find  application  in  actual 
economic  life.  The  theory  does  not  take  into  account  the 
possibility  of  increasing  production  by  the  invention  of 
methods  of  wage  payment  as  incentives  to  efficiency,  nor 
does  it  take  into  account  the  pressure  which  can  be  brought 
to  bear  by  organized  labor  or  reform  legislation.  The 
wages  fund  has  been  highly  variable,  the  chief  limita- 
tion upon  it  being  that  beyond  a  certain  point  wages  will 
encroach  upon  the  returns  to  management  and  ownership 


118  Labor:  Its  Part  in  Production 

so  greatly  as  to  discourage  them  from  undertaking  their 
part  in  production. 

A  third  theory  is  the  commodity  theory  of  wages.  Ac- 
cording to  its  teachings  wages  are  subject  to  all  of  the 
market  laws  of  supply  and  demand.  The  price  paid  to 
labor  is  fixed  in  the  same  way  as  the  price  paid  for  pig 
iron  or  coal.  A  large  supply  of  labor  relative  to  the  de- 
mand leads  to  a  low  wage  and  a  low  supply  of  labor  rela- 
tive to  demand  leads  to  a  high  wage.  Labor  is  looked 
upon  as  a  thing  to  be  bought  and  sold  in  the  same  fashion 
as  any  other  commodity.  Labor  has  long  smarted  at  the 
humiliating  inference  of  the  theory,  and  organized  labor 
in  1916  secured  the  passage  of  a  law  through  Congress  de- 
claring that  labor  should  henceforth  not  be  considered  a 
commodity  or  an  article  of  commerce.  Experience  since 
that  time  has  indicated  that  the  passage  of  a  congressional 
statute  does  not  alter  the  attitude  of  employers  towards 
employees,  nor  prevent  them  from  still  hiring  labor  at  as 
low  a  figure  as  the  market  will  bear.  A  number  of  fea- 
tures of  the  commodity  theory  are  important.  It  con- 
siders labor  as  a  collection  of  individual  units,  but  fails  to 
consider  the  changed  marketing  power  of  labor  as  an  or- 
ganized group.  A  million  men  in  the  labor  market  as 
individuals  might  find  their  wages  fixed  by  arbitrary  forces 
of  supply  and  demand,  but  the  same  million  laborers  or- 
ganized into  a  powerful  labor  union  might  be  able,  as 
experience  has  abundantly  shown,  to  raise  the  wage  level 
considerably  above  the  old  market  figure.  In  practice  the 
effort  of  employers  to  consider  labor  as  an  article  of  com- 
merce has  amounted  to  an  attempt  for  the  most  part  to 
secure  the  maximum  of  work  for  the  minimum  of  wages. 
Labor  has  widely  matched  the  attitude  of  the  employers 
by  determination  to  give  the  minimum  of  work  for  the 
maximum  of  wages.  The  laborer  when  looked  upon  as  a 
commodity  has  come  to  feel  that  so  far  as  wages  are  con- 
cerned he  "gets  what  he  can,"  whereas  the  employer  has 
come  to  feel  that  the  laborer  after  all  "gets  just  what  he 
deserves."  The  commodity  theory  of  labor,  therefore, 
leads  to  unwholesome  and  embittered  feelings  in  the  in- 


Labor:  Its  Part  in  Production  119 

dustrial  world.  It  takes  little  account  of  the  need  of  the 
workers  to  live,  and  reckons  as  of  little  importance  the 
higher  elements  in  the  human  factor  of  industry. 

A  fourth  theory  is  the  productivity  theory,  by  which  it 
is  held  that  "competition  secures  for  the  laborer  just  what 
he  produces."  If  the  wage  is  low,  that  of  itself,  so  the 
theory  runs,  is  an  indication  that  the  productive  efficiency 
of  the  worker  is  low.  In  criticism  of  this  theory,  it  may  be 
pointed  out  that  although  it  is  true  that  wages  cannot  ex- 
ceed the  productive  power  of  labor,  nevertheless  it  is  at  the 
same  time  true  that  there  is  no  way  of  measuring  the  pro- 
ductive power  of  labor.  All  efforts  to  determine  the 
proportionate  parts  which  the  electrician,  the  telephone 
girl,  the  janitor,  the  machine  operator,  the  industrial  en- 
gineer, and  the  salesman  contribute  to  the  finished  pair  of 
shoes  are  obviously  futile.  Moreover,  even  where  rough 
approximations  are  estimated  of  the  part  played  by  each 
member  of  the  productive  organization,  it  remains  true  that 
the  employer  need  not  pay  in  full  the  estimated  share  of 
each.  As  a  matter  of  fact,  the  general  tendency  on  the 
part  of  employers  is  to  make  as  low  an  estimate  as  possible 
of  the  share  of  labor  in  the  productive  process  and  there- 
after to  pay  out  in  the  form  of  wages  a  sum  as  far  below  this 
estimate  as  conditions  will  permit.  A  further  feature  of 
the  productivity  theory  is  important,  namely,  that  if  the 
share  which  labor  receives  for  its  productivity  encroaches 
too  much  upon  the  share  assigned  to  management  and 
ownership,  these  latter  factors  will  withdraw  from  the 
productive  process.  It  will  not  be  worth  their  while  to 
continue.  The  limit  to  which  each  of  the  factors  can  go  in 
exacting  its  share  is  the  point  at  which  any  other  factor's 
share  becomes  so  small  that  that  factor  is  driven  out  of 
business  organization. 

Obviously  there  are  important  respects  in  which  each  of 
these  theories  coincide  with  the  economic  facts  of  the  mod- 
ern day,  and  other  equally  important  respects  in  which 
these  theories  give  a  grossly  inadequate  interpretation  of 
the  facts  of  the  case.  It  is  therefore  much  more  service- 
able and  accurate  to  conceive  of  a  pluralistic  theory  of 


120  Labor:  Its  Part  in  Production 

wages  and  to  interpret  them  as  the  resultant  of  a  very 
wide  variety  of  influences.  For  purposes  of  clearness 
and  convenience  these  influences  may  be  grouped  under 
the  following  headings:  standard  of  living,  incentives, 
bargaining  power,  habit  and  custom. 

Standard  of  Living 

The  standard  of  living  as  a  basis  of  wage  determina- 
tion is  a  comparatively  new  principle  in  economic  life 
and  is  not  yet  universally  accepted.  The  older  concep- 
tion was  that  industry  made  possible  the  payment  of 
only  a  limited  wage,  and  it  was  not  the  fault  of  the  em- 
ployer if  this  amount  was  so  low  as  to  make  it  scarcely 
possible  for  the  laborer  to  live,  even  in  the  dirtiest  and 
meanest  fashion.  The  business  acknowledged  no  re- 
sponsibility for  pajnng  a  wage  which  made  certain  a 
fixed  standard  of  living  among  the  workers.  But  dur- 
ing the  last  half  generation,  the  principle  has  been 
winning  increasing  acceptance  that  the  industry  owes  the 
workers  a  good  standard  of  living.  An  industry  which  can- 
not afford  to  pay  a  wage  adequate  for  such  a  standard  is 
parasitical  on  society  and  cannot  justify  itself.  Although 
the  new  idea  is  still  short  of  realization  in  many  lines  of 
industry,  nevertheless  there  is  a  steady  tendency  toward 
its  wider  acknowledgment. 

"War  time  government  boards  did  much  to  strengthen 
the  movement,  acting  under  the  conviction  that  the  stand- 
ard of  living  as  a  wage  principle  has  both  an  humanitarian 
and  an  efficiency  justification.  Felix  Frankfurter,  as 
chairman  of  the  United  States  "War  Labor  Policies  Board, 
asserted:  "The  lesson  of  the  war  is  that  the  adoption  of 
so-called  industrial  standards,  involving  also  standards  of 
distribution  of  the  product  in  the  form  of  wages,  results 
in  a  higher  and  more  continuous  output. 

"As  to  wages,  the  general  level  has  increased  during  the 
war.  That  is  partly  the  reflex  of  economic  conditions  ir- 
relevant to  the  discussion,  but  there  was  also  a  conscious 
effort  to  raise  submerged  standards  of  existence  for  work- 
ers."   Moreover  this  standard  is  not  the  income  for  the 


Labor:  Its  Part  m  Production  121 

individual,  but  for  the  faimly,  "since  the  family  is  the 
unit  of  industrial  work. ' '  ^ 

The  living  wage  allows  for  a  wide  range  of  interpreta- 
tion. The  truest  conception  of  the  principle  is  briefly 
stated  by  Frank  P.  Walsh,  joint  chairman  of  the  National 
War  Labor  Board  in  the  following  form:  "Now  that 
term  is  one  having  different  meanings  to  different  per- 
sons. The  living  wage  suggests,  perhaps,  that  amount  of 
wage  which  will  keep  life  in  the  human  body.  That  is, 
of  course,  not  what  we  understand  by  it.  It  has  a  definite 
meaning  in  the  world  of  industry  and  in  the  literature  of 
modern  economics.  It  means  the  amount  of  wage  upon 
which  a  worker  and  his  family  may  be  able  to  subsist  in 
health  and  with  reasonable  comforts. ' '  ^  The  range  of  ex- 
penditures covered  by  the  living  wage  comprehends  such 
items  as  food,  housing,  clothing,  fuel,  light,  carfare,  health, 
insurance,  and  sundry  minor  factors.  The  minimum  which 
an  American  worker  needs  in  order  to  be  able  to  keep  him- 
self and  his  family  in  a  state  of  reasonable  comfort  and 
health  is  the  living  wage.  To  insure  vitality,  health  and 
vigor  is  not  merely  good  ethics;  it  is  good  business.  The 
American  standard  of  living  is  higher  than  that  of  many 
other  countries,  and  this  fact  of  itself  accounts  in  consider- 
able measure  for  the  relatively  high  efficiency  of  the 
American  worker. 

The  exact  amount  of  wage  which  is  necessary  to  meet 
such  a  minimum  requirement  is  difficult  to  state  for  the 
simple  reason  that  price  levels  are  constantly  fluctuating 
and  with  their  changes,  the  purchasing  power  of  wages 
fluctuates  accordingly.  The  essential  question  is  not : 
How  much  is  the  wage  figure  but  rather  how  much  will  the 
wage  buy?  Before  the  war,  the  consensus  of  a  number  of 
careful  wage  and  cost  of  living  investigations  was  that  for 
the  family  of  the  common  laborer,  an  income  of  less  than 
$850  does  not  permit  the  maintenance  of  a  decent  Ameri- 
can standard  of  living.  This  figure,  as  in  the  case  of 
those  mentioned  later,  applies  to  a  family  of  five  members. 
This  is  taken  in  wage  studies  as  "the  average  family." 

'i- Survey,  Dec.  7,  1918.  ^  Idem. 


122  Labor:  Its  Part  in  Production 

Similar  studies  made  during  the  year  1918  indicated  that 
the  minimum  of  subsistence  at  that  time  ranged  between 
$1,400  and  $1,500.  W.  F.  Ogburn  states,  "Such  a 
standard  of  living  corresponds  approximately  with  that 
of  common  or  unskilled  labor,  and  is  what  is  generally 
referred  to  as  a  living  w^age."  Fluctuations  of  prices 
and  wages  subsequent  to  1918  must  be  taken  into  ac- 
count in  estimating  the  present  minimum  of  subsistence 
wage  figure.  The  most  comprehensive  and  reliable  wage 
and  cost  of  living  investigations  in  this  country  are  those 
made  by  the  United  States  Bureau  of  Labor  Statistics, 
under  the  direction  of  Royal  Meeker,  The  method  of 
the  Bureau's  investigations  is  stated  as  follows,  "It  will 
become  more  and  more  essential  as  time  passes  that  the 
decision  of  all  questions  involving  the  economic  well- 
being  of  the  laboring  classes  should  rest,  not  on  guess- 
work or  on  ex-parte  statements,  whether  of  employers  or 
employees,  but  on  the  accurate,  reliable  and  strictly  im- 
partial results  of  investigations  such  as  the  industrial  sur- 
vey."^ In  1919,  Mr.  Meeker  stated  the  findings  arrived 
at  by  the  government  investigations  as  follows:  "Ameri- 
can families  on  the  average  are  not  fully  nourished  until 
their  yearly  income  reaches  $1,800.  .  .  .  The  average  in- 
come and  the  modal  income  both  fall  well  below  $1,600.  .  .  . 
[These  figures]  do  not  mean  that  our  working  population  is 
dying  of  slow  starvation ;  nothing  of  the  sort.  But  they  do 
indicate  that  the  workers  of  America  are  obliged  to  live  on 
a  diet  too  restricted  and  monotonous  for  the  maintenance  of 
as  high  a  degree  of  efficiency  and  health  as  ought  to  be 
maintained  as  a  reasonable  minimum. ' '  ^  This  finding  is 
substantiated  by  the  bulk  of  reputable  authorities  in  the 
field,  and  may  safely  be  taken  as  the  impartial,  scientific 
facts  of  the  case.^ 

For    purposes    of    full    clearness,    it    is    necessary    to 
relate  the  so-called  living  wage  level  to  two  other  levels  of 

1  Bulletin  265,  United  States  Bureau  of  Labor,  "Survey  of  Selected 
Industries  in  1919,"  p.  24. 

2  Monthly  Labor  Reinew,  Volume  IX,  pp.  7-13. 

3  See  P.  Douglas  and  F.  Lamberton,   Ame^-ican  Economic  Reviev), 
Vol.  XI,  pp.  409-42'6. 


Labor:  Its  Part  in  Production  123 

wage  and  life, — what  may  be  called  the  poverty  level  and 
what  may  be  called  the  comfort  level.  The  poverty  level 
is  a  demoralizing  and  devitalizing  level.  "Families  liv- 
ing at  this  level  receive  charity  in  the  form  of  gifts  or 
free  medical  service  or  in  other  ways.  Or  if  they  do  not 
do  this  they  attempt  to  live  on  a  level  so  low  as  to  weaken 
them  eventually  to  such  an  extent  that  disease  inevitably 
overtakes  them. ' '  Further,  Parmelee,  after  an  extended  sur- 
vey of  the  statistics  and  records  bearing  on  the  problem, 
concludes,  ''In  view  of  the  above  facts,  as  well  as  various 
others  that  might  be  cited,  it  seems  reasonable  to  assume 
that  the  number  of  persons  in  this  country  receiving  charit- 
able aid  ranges  from  five  to  ten  per  cent.,  varying  some- 
what according  to  economic  and  other  social  conditions. ' '  ^ 
Within  the  poverty  level  should  be  included  those  whose 
incomes  are  so  low  that  although  they  do  not  resort  to 
charity  for  subsistence,  nevertheless  exist  under  conditions 
which  involve  degeneration  and  distress.  As  Parmelee 
states,  "We  have  plenty  of  evidence  that  the  number  of 
those  who  do  not  even  reach  the  lower  minimum  standard 
of  living  is  very  great,  probably  exceeding  ten  per  cent,  of 
the  population."  ^ 

For  a  group  of  several  millions  of  people  in  the  United 
States  poverty  of  a  sort  which  is  devitalizing  is  a  haunting 
fact.  As  a  statement  of  plain  scientific  findings,  the  fol- 
lowing words  by  Hollander  are  directly  to  the  point: 
"There  are  great  bodies  of  people  in  country  and  in  city 
who  from  birth  have  less  than  enough  food,  clothing,  and 
shelter;  who  from  childhood  must  toil  long  and  hard  to 
secure  even  that  insufficient  amount ;  who  can  benefit  little 
from  the  world's  advance  in  material  comfort  and  in 
spiritual  beauty,  because  their  bodies  are  undernourished, 
their  minds  are  overstrained  and  their  souls  deadened  by 
bitter  struggle  and  want.  These  are  the  real  poor  of  every 
community — the  masses  who,  not  lacking  in  industry  and 
thrift,  are  yet  never  really  able  to  earn  enough  for  decent 

1  "Poverty  and  Social  Progress,"  p.  103. 
2lhid.,  p!   106. 


124  Labor:  Its  Part  in  Production 

existence  and  who  toil  on  in  constant  fear  that  bare  neces- 
sities may  fail, ' '  ^ 

The  ordinary  working  of  competitive  wage  forces  has 
not  averted  the  menace  of  this  poverty  line.  From  a 
social  and  economic  standpoint,  the  degeneracy  and  devital- 
ization which  goes  on  steadily  within  these  classes  is  a 
national  liability  of  the  severest  sort.  Economic  science 
can  find  no  sound  laws  or  principles  which  deserve  to 
stand  in  the  way  of  eliminating  the  poverty  line.  Supply 
and  demand,  the  wages  fund,  productivity, — any  and  all 
of  the  wage  theories  present  no  reasons  w^hy  the  poverty 
line  is  an  inevitability.  There  is  nothing  unscientific  in 
insisting  that  economics  must  concern  itself  with  sentiment 
as  well  as  with  dollars  and  cents.  The  poverty  depths  are 
a  challenge  to  the  industrial  order,  and  economic  science 
must  accept  the  poverty  problem  as  a  primary  instead  of 
a  secondary  one. 

The  dehumanizing  consequences  of  poverty  are  not  a 
matter  of  guesswork  but  of  scientific  ascertainment.  The 
death  rate  due  to  the  vicissitudes  of  poverty  is  approxi- 
mately double  that  prevailing  among  the  classes  who  have 
higher  incomes.  The  infant  mortality  rates  among  these 
impoverished  groups  is  more  than  double  that  of  the  nor- 
mal well-to-do  groups  in  America.  Perhaps  even  worse 
is  the  fact  that  the  number  of  days  of  sickness  in  propor- 
tion to  the  number  of  days  of  health  is  between  fifty  and 
one  hundred  per  cent,  greater  among  the  laboring  than 
among  the  professional  classes.  The  defective  wages 
mean  unfit  diet,  tenement  crowding,  scanty  clothing,  in- 
adequate mental  care,  frequent  disease,  an  enfeebled 
physique  and  a  harassed  and  haunted  mind.  From  a 
strictly  scientific  standpoint,  economics  is  compelled  to  de- 
liver a  most  scathing  denunciation  of  the  toleration  of  the 
poverty  levels  in  American  society.- 

A  third  level  has  been  mentioned :  the  minimum  comfort 
level.     This  level  necessitates  an  income  from  $300  to  $400 

1  "The  Abolition  of  Poverty,"  pp.  4-5. 

2  Hayes,  "Introduction  to  Study  of  Sociology,"  pp.  98-99, 


Labor:  Its  Part  in  Production  125 

above  the  living  wage  level.  An  income  within  the  com- 
fort range  would  allow  for  a  positive  measure  of  cultural 
development.  It  would  make  possible  more  reading,  a 
better  utilization  of  leisure  hours,  better  educational  op- 
portunities for  children,  more  valuable  forms  of  recreation. 
All  in  all  it  would  be  a  positive  instead  of  negative 
influence  and  would  tend  to  elevate  the  worker  and  his 
family  morally,  mentally  and  physically  instead  of  handi- 
cap him  in  all  these  ways.  .  The  minimum  comfort  level 
rests  upon  the  encouragement  of  higher  standards  of 
living  and  puts  a  premium  upon  the  development  of  per- 
sonality and  the  upbuilding  of  character.  It  frankly 
concedes  that  such  a  human  development  is  a  distinct  eco- 
nomic asset  and  that  the  distribution  of  the  national  product 
should  more  and  more  be  controlled  and  organized  toward 
that  end. 

No  treatment  of  this  subject  would  be  accurate  which 
failed  to  give  full  recognition  to  facts  of  excessive  wages 
in  some  occupations  and  the  extravagance  and  prodigality 
of  numbers  of  wage  earners.  Here  and  there,  powerful 
trade  unions  have  exacted  wage  scales  quite  out  of  pro- 
portion to  the  normal,  and  certain  employers,  such  for 
example  as  Henry  Ford,  have  voluntarily  given  workers 
wages  and  bonuses  decidedly  above  the  average.  Some  of 
these  extraordinarily  high  earnings  are  put  to  good  use  while 
others  find  their  way  into  channels  of  conspicuous  waste 
and  extravagance.  Moreover,  the  average  family  income 
does  not  give  a  clue  to  the  extent  by  which  certain  fami- 
lies exceed  the  average  and  others  fall  short  of  it.  Childless 
families  might  obtain  from  a  certain  income  all  the  needs 
and  comforts  of  life  while  the  same  income  for  families 
with  a  large  number  of  children  would  necessitate  the 
strictest  economy  amounting  to  privation,  but  for  unmar- 
ried individuals  without  any  dependents  would  allow  for 
real  prodigality  and  extravagance.  "When  the  family  in- 
come is  not  derived  solely  from  the  earnings  of  the  head 
of  the  household,  but  from  other  sources,  such  as  from 
roomers  or  boarders,  or  from  jobs  held  by  sons  or  daugh- 
ters or  wife,  the  total  family  fund  is  likely  to  be  adequate 


12G  Labor:  Its  Part  in  Production 

and  to  allow  for  some  flourish  and  luxury.  Well  paid  in- 
dividuals who  have  no  one  to  support  but  themselves  are 
for  the  most  part  the  ones  who  flaunt  silks  and  furs  and 
fineries,  and  there  are  just  enough  of  these  individuals  to 
make  much  show  and  create  vivid  impressions  in  the  public 
mind.  Methods  of  wage  payment,  as  thus  far  contrived,  do 
not  give  full  recognition  to  these  variants,  but  deal  on  the 
basis  of  averages.  The  wage  groups,  when  brought  side  by 
side,  in  their  general  proportions,  stand  about  as  follows :  a 
topmost  layer  of  workers  enjoy  extraordinary  incomes 
which  allow  for  some  degree  of  extravagance;  a  bottom 
layer  of  several  millions  of  people  are  within  the  poverty 
line;  the  great  run  of  unskilled  labor  barely  comes  into 
the  minimum  of  subsistence  level;  and  the  group  within 
the  minimum  comfort  level,  although  possessed  of  many 
examples,  nevertheless  relatively  to  the  other  groups,  is 
decidedly  small.^ 

The  status  of  the  principle  of  the  standard  of  living  as 
a  wage  base  is  therefore  far  from  satisfactory  realization. 
As  will  be  pointed  out  more  fully  in  a  later  chapter,  fed- 
eral and  state  governmental  endorsement  of  the  principle 
has  given  it  strength,  and  conspicuous  progressive  em- 
ployers have  lent  the  weight  of  their  authority  to  it.  The 
responsibility  of  each  industry  for  the  payment  of  a  rea- 
sonable living  wage  is  safely  on  its  way  to  general  recog- 
nition. It  sets  the  base  below  which  the  worker's  income 
must  not  be  allowed  to  fall.  Above  that  base  rate  is  room 
for  the  play  of  other  factors  of  many  kinds,  a  number  of 
which  are  mentioned  in  the  sections  immediately  follow- 
ing. The  emphasis  is  unreservedly  upon  the  human 
necessity  of  a  living  wage  as  a  primary  force.  To  quote 
the  report  of  Ex-President  "Wilson's  Second  Industrial 
Conference  in  1920,  "Considered  from  the  standpoint  of 
public  interest  it  is  fundamental  that  the  basic  wages  of 
all  employees  should  be  adequate  to  maintain  the  employee 
and  his  family  in  reasonable  comfort,  and  with  adequate 
opportunity  for  the  education  of  his  children.  When  the 
wages  of  any  group  fall  below  this  standard  for  any  length 

1  See  A.  Epstein,  "Facing  Old  Age,"  Chapter  on  "American  Wages." 


Labor:  Its  Part  in  Production  127 

of  time,  the  situation  becomes  dangerous  to  the  well-being 
of  the  state.  No  country  that  seeks  to  protect  its  citizens 
from  the  unnecessary  ravages  of  disease,  degeneration  and 
dangerous  discontent,  can  consistently  let  the  unhampered 
play  of  opposing  forces  result  in  the  suppression  of  wages 
below  a  decent  subsistence  level.  Above  that  point  there 
may  well  be  a  fair  field  for  the  play  of  competition  in 
determining  the  compensation  for  special  ability,  for  spe- 
cial strength  or  special  risk  (where  risk  is  unavoidable), 
but  below  that  point  the  matter  becomes  one  of  which  the 
state  for  the  sake  of  its  own  preservation  must  take  ac- 
count." 

Incentives 

The  psychology  of  incentives  underlies  the  invention  of  a 
number  of  widespread  wage  policies.  The  possessive  in- 
stincts of  the  workers  are  stimulated  by  devices  for  gradu- 
ating wages  in  proportion  to  the  effort  of  the  worker.  The 
piece  rate  method  of  payment  rewards  labor  in  proportion 
to  the  number  of  pieces  of  product  turned  out.  The  bonus 
method  of  payment  starts  with  a  base  rate  of  pay  for  a 
given  task,  and  adds  to  this  base  rate  an  increase  in  some 
ratio  to  the  excess  of  production  above  the  standard  task. 
The  setting  of  the  standard  task  involves  time  study  of 
the  separate  stages  of  the  manufacturing  process  and  a 
careful  estimate  of  the  amount  of  work  which  a  normal 
laborer  ought  to  turn  out  in  a  certain  period  of  time.  The 
bonus  constitutes  a  reward  for  speeding  up  and  for  turn- 
ing out  a  product  above  the  normal.  The  United  States 
Bureau  of  Labor  reported  in  1904  that  the  average  in- 
crease in  production  where  piece  rates  are  in  vogue  ranges 
around  twenty-five  per  cent.  Experiments  with  the  bonus 
system  have  often  increased  efficiency  from  100  to  several 
hundred  per  cent.  General  experience  would  indi- 
cate that  when  rightly  applied  these  two  forms  of  finan- 
cial incentive  are  effective  in  securing  an  increased  pro- 
duction. 

A  financial  incentive  for  regularity  of  attendance  and 
for  promptness  has  bfeen  effectively  useVl,  taking  the  form 


128  Labor:  Its  Part  in  Production 

of  premiums  in  money.  An  increase  in  wage  or  a  bonus 
award  for  long  service  with  the  company  serves  in 
many  cases  as  an  incentive  to  loyalty  and  a  better  spirit 
of  workmanship.  Many  concerns  have  found  it  useful 
to  introduce  financial  incentives  for  quality  of  workman- 
ship and  experience  has  often  shown  that  where  a  pre- 
mium is  paid  for  workmanship  which  involves  a  minimum 
of  spoiled  product,  there  results  not  only  a  genuine  pride 
of  workmanship  but  an  actual  increase  in  the  quantity  of 
output  as  well.  Many  concerns  find  it  advantageous  to 
pay  high  wages  as  a  deliberate  policy,  because  the  high 
lates  are  conducive  to  labor's  loyalty  and  interest  in 
work.  Such  concerns  find  that  the  greater  efficiency  of 
labor  under  high  wages  actually  reduces  the  labor  cost  in 
production. 

The  strategy  of  using  financial  incentives  has  frequently 
taken  the  form  of  supplementing  the  wage  income  with 
special  money  returns.  Profit  sharing  is  an  attempt  to 
assign  the  workers  a  fraction  of  the  net  profits  of  the 
concern  at  certain  periods.  Although  in  carefully  regu- 
lated experiments  profit  sharing  has  met  with  favorable 
results,  nevertheless,  it  has  led  to  an  alarming  number  of 
failures  and  especially  when  it  has  been  looked  to  as 
a  substitute  for  a  system  of  wage  payment  which  the 
laborer  could  consider  sound,  it  both  has  failed  as  a  stimu- 
lant and  has  served  to  excite  discontent  and  a  feeling  of  in- 
justice among  the  workers.  Many  concerns  encourage 
their  employees  to  buy  shares  of  common  stock,  the  under- 
lying reason  being  the  desire  to  stimulate  a  loyalty  to  the 
concern  by  virtue  of  the  fact  that  the  worker  receives 
dividends  from  time  to  time,  and  any  form  of  labor  unrest 
which  might  interfere  with  regular  dividends  would  be 
repugnant  to  the  worker  owning  the  stock.  Of  this  policy 
it  may  briefly  be  said  that  the  financial  incentive  often 
serves  a  good  purpose,  but  cannot  be  depended  upon  to 
secure  the  loyalty  of  the  worker  unless  all  of  the  other 
essential  wage  and  working  conditions  are  sound  and  satis- 
factory. Welfare  work  has  often  been  inaugurated  for 
genuine  philanthropic   purposes,  and  often   for  purposes 


Labor:  Its  Part  in  Production  129 

of  soothing  and  pacifying  labor  with  attractive  surface 
comforts  without  supplying  the  more  fundamental  necessi- 
ties which  the  laborer  requires.  Where  the  welfare  work 
has  come  from  the  top  down,  and  has  not  been  devised  by 
the  joint  wisdom  of  labor  and  capital,  it  has  commonly 
given  to  labor  the  impression  that  it  is  a  paternalistic 
program.  Moreover,  labor  has  figured  that  it  is  a  paternal- 
ism at  its  own  expense.  Labor  would  prefer  to  have  the 
cost  of  welfare  work  given  in  the  form  of  an  increased  wage. 
Another  type  of  supplementary  remuneration  is  found  in 
various  thrift  and  insurance  devices,  often  regulated  in 
amount  by  the  length  of  time  the  worker  has  been  with  the 
company,  or  by  some  act  on  the  worker's  part  which  is 
useful  to  employer  and  employee.  All  of  these  forms  of 
incentives,  supplementing  the  wage  payment,  therefore, 
may,  when  rightly  handled,  serve  a  good  purpose  by  in- 
creasing the  stake  of  the  worker  in  the  company.  But 
most  emphatically  it  must  be  remembered  that  they  are  not 
a  substitute  for  a  sound  wage  policy  and  that  the  prerequi- 
site to  all  of  them  is  a  satisfactory  and  scientific  wage 
schedule. 

Bargaining  Power 

A  third  group  of  wage  influences  is  found  in  the  rela- 
tive bargaining  power  of  employer  and  employee.  The 
worker  has  something  to  sell, — his  labor.  The  employer  is 
in  the  market  to  buy  labor.  The  worker  as  seller  wants 
as  high  a  price  for  his  labor  as  possible ;  the  employer  wants 
to  buy  at  a  "bargain  price."  The  laborer  finds  that  if  he 
refuses  to  work  at  the  price  offered,  another  man  is  stand- 
ing ready  to  take  the  job  at  the  figure  set,  and  glad  to  get 
the  chance.  As  an  individual,  his  bargaining  power  is 
weaker  than  that  of  the  employer. 

A  group  of  individuals,  finding  this  weakness,  determine 
to  band  themselves  into  a  labor  organization  and  to  sell 
their  labor  collectively.  Their  bargaining  power  there- 
upon increases  by  virtue  of  the  fact  that  if  they  threaten 
to  refuse  to  sell  their  labor  as  a  group  because  the  wage 
offered  is  too  low,  the  employer  faces  the  prospect  of  being 


130  Labor:  Its  Part  in  Production 

unable  to  carry  on  his  business  and  fulfill  his  contracts. 
The  theory  of  collective  bargaining  power  rests  upon  a 
basis  of  historical  facts,  briefly  stated  by  J.  H.  Hollander 
as  follows,  "This  much,  hov/ever,  can  safely  be  set  forth: 
in  those  trades  where  an  efficiently  organized,  intelligently 
directed  trade  unionism  prevails,  wages  have  either  risen 
higher  than  they  otherwise  would  have  or  have  suffered 
less  reductions  than  would  otherwise  have  occurred. ' '  ^ 

However,  scarcely  one-half  of  the  industrial  wage  earn- 
ers of  the  United  States  are  organized.  Hence  for  the  sub- 
stantial portion  of  workers,  the  individual  is  still  at  the 
mercy  of  his  inferior  bargaining  power.  Obviously  the  forces 
of  supply  and  demand  operate  w-ith  particular  strength 
where  individual  bargaining  prevails.  Under  collective 
bargaining,  the  workers  hold  the  power  to  withdraw  their 
labor  from  the  plant  en  masse  and  under  this  threat  the 
employer  is  pressed  into  the  payment  of  an  increased 
wage.  The  effectiveness  of  the  potential  threat  varies 
greatly  from  employer  to  employer  depending  upon  his 
temperament,  or  the  state  of  his  business,  or  the  degree  of 
his  backing  by  other  employers.  If  by  temperament  he 
is  strongly  self-assertive  and  intolerant  of  interference,  he 
may  fight  it  out  with  labor,  even  to  the  point  of  a  protracted 
strike  or  lockout.  If  the  state  of  the  business  is  poor,  if 
profits  are  low,  and  depression  or  loss  stares  him  in  the 
face,  so  that  wage  increases  would  ruin  the  business,  he 
may  use  these  facts  to  dissuade  labor  from  exercising  its 
collective  bargaining  power  unreasonably.  If  other  em- 
ployers are  behind  him,  through  employers'  organizations 
of  one  sort  and  another,  his  relative  bargaining  power  may 
be  so  enhanced  as  to  offset  labor's  collective  strength.  But 
after  due  allowance  has  been  made  for  these  influences, 
the  fact  remains  that  labor's  bargaining  power  tends  to 
become  greater  when  used  collectively,  and  wages  tend 
to  be  forced  to  higher  levels. 

Under  collective  bargaining,  the  labor  cost  to  the  em- 
ployer is  frequently,  though  not  always,  by  any  means, 
considerably  increased.  Labor  cost  inclines  to  go  up  not 
1  Abolition  of  Poverty,"  p.  55. 


Labor:  Its  Part  in  Production  131 

merely  because  a  higher  wage  sum  is  paid  out,  but  also  be- 
cause the  efficiency  of  the  worker  is  sometimes  severely  re- 
stricted by  the  collective  bargaining  group.  For  example, 
in  many  cases  bricklayers'  unions  have  not  merely  pushed 
wages  up  but  have  laid  down  a  maximum  number  of  bricks 
which  the  worker  is  allowed  to  lay  in  one  day.  This  maxi- 
mum is  decidedly  low  in  comparison  with  the  possible 
efficiency  of  the  bricklayer.  "Wherever  restriction  of  pro- 
duction is  practiced  at  the  same  time  that  collective  bar- 
gaining is  used  to  push  wages  up  the  labor  cost  becomes 
abnormally  great,  and  in  the  long  run  workers  as  well 
as  employers  are  grossly  injured.  Collective  bargaining 
used  in  such  forms  ultimately  defeats  its  own  purposes. 
The  use  of  collective  power  to  restrict  production  deserves 
sharp  condemnation,  for  it  is  a  source  of  loss  to  the 
nation  and  of  waste  and  damage  to  both  employer  and 
employee. 

Yet  mere  condemnation  of  restriction  of  production  will 
certainly  not  eliminate  the  fault.  Restriction  of  produc- 
tion is  the  instinctive  response  of  the  worker  to  a  number 
of  painful  facts  in  his  industrial  experience.  One  cardinal 
fact  of  this  type  is  unemployment.  The  millions  of  work- 
ers who  constantly  stand  in  fear  of  irregular  employ- 
ment, seasonal  fluctuations,  or  periodical  depressions  are 
responding  in  the  natural  psychological  manner  when  they 
seek  to  make  the  job  last  as  long  as  possible.  The  job  in 
hand  is  an  immediate  source  of  income;  if  it  is  lost,  the 
hunt  may  be  long  and  discouraging  before  a  new  one  is 
found.  It  is  inevitable  that  the  worker  should  "make 
work"  out  of  a  present  job  if  he  expects  to  be  laid  off 
when  it  is  finished.  As  long  as  the  fear  of  unemployment 
is  a  dynamic  force  in  the  worker's  experience,  no  amount  of 
education,  propaganda  or  condemnation  can  be  expected  to 
abolish  his  impulse  to  make  his  work  last  as  long  as  possi- 
ble. Many  other  facts  serve  as  causes  in  the  "make  work" 
tactics  of  labor.  The  unsatisfied  instinct  of  workmanship, 
the  stifled  desire  for  self-assertiveness,  the  constantly 
curbed  possessive  impulses,  the  thwarted  desire  to  act  as 
a  group,  the  general  repressiveness  of  the   economic   en- 


132  Labor:  Its  Part  in  Production 

vironment  over  the  instinctive  demands  of  human  nature, 
— all  establish  a  psychological  foundation  for  restriction  of 
production.  Frequently,  the  concrete  forms  of  restriction 
are  catalogued  and  written  into  a  collective  bargain  be- 
tween a  union  and  an  employer.  More  often,  the  forms 
of  restriction  are  unorganized  and  untabulated ;  they  are 
simply  the  spontaneous  resistance  of  human  nature  to  an 
economic  environment  which  has  not  been  scientifically 
adapted  to  human  nature.  Collective  bargaining  through 
unions  is  not,  as  a  rule,  the  cause  of  restriction  of  produc- 
tion; the  basic  cause  is  in  the  maladaptation  between  the 
economic   organization   and   human  nature. 

Collective  bargaining  power,  when  not  perverted  to  harm- 
ful ends,  is  a  real  safeguard  to  the  laborer.  Without  it,  he 
is  at  the  mercy  of  forces  which  frequently  are  not  con- 
siderate enough  of  his  needs  and  welfare.  Without  it  he 
has  no  guarantee  that  his  wages  will  come  up  to  the  sum 
which  his  productivity  warrants;  no  guarantee  that  he 
can  rise  above  the  bare  subsistence  level,  no  guarantee  that 
his  share  of  the  total  fund  of  production  will  be  equitably 
fi'-^ertained;  no  guarantee  that  unlimited  supply  and  de- 
mand forces  will  not  drive  his  wage  down  to  harsh  and 
intolerable  levels.  His  group  bargaining  is  his  great  safe- 
guard against  unfair,  inadequate  or  unscrupulous  wage 
determination.  However,  the  power  which,  when  rightly 
■used,  is  a  safeguard  of  labor's  legitimate  interests,  is,  when 
used  by  unscrupulous  or  extremist  leaders,  capable  of 
menacing  the  legitimate  interests  of  the  employer.  The 
bargaining  power  of  the  employer  is  his  safeguard  against 
the  excessive  or  unreasonable  demands  of  labor,  and  this 
power  often  can  be  acquired  only  by  the  organization  of 
several  employers  to  cope  with  the  organization  of  laborers. 
Organized  bargaining  power  on  both  sides  has  been  re- 
sorted to  as  the  only  practical  safeguard  against  excesses 
by  either  side.  This  sets  up  a  kind  of  balance  of  indus- 
trial power,  and  is  not  unlike  the  principle  of  the  balance  of 
power  in  international  relations.  It  leads  to  a  feverish 
effort  to  build  greater  and  greater  power  on  both  sides, 
much  as,  internationally,  the  balance  of  power  system  leads 


Labor:  Its  Part  in  Production  133 

to  a  feverish  competition  to  build  armaments  on  an  ever 
greajter  scale.  Collective  bargaining  is  usually  militant  and 
threatening  in  its  attitude,  and  involves  a  veiled  threat 
of  strike  or  lockout  unless  demands  are  met.  It  lacks  a 
basis  of  confidence  and  co-operation  between  employer  and 
employee.  It  is  not  an  ideal  form  of  industrial  relation- 
ship, and  probably  not  the  ultimate  form,  but  it  occupies 
a  very  prominent  place  in  the  present  stage  of  the  evolu- 
tion of  industrial  relations  and  plays  a  large  part  in  deter- 
mining the  wage  scales  in  present-day  industry. 

Custom  and  Habit 

Habit  and  custom  suggest  a  fourth  group  of  wage  fixing 
influences.  Lines  of  work  which  custom  accepts  as  carry- 
ing prestige  and  social  esteem  often  command  a  relatively 
low  wage.  Examples  would  be  found  in  the  "white-col- 
lared" clerical  workers,  or  in  the  teaching  profession. 
Again,  the  customary  standards  of  one  locality  often  keep 
wages  higher  (or  lower,  as  the  case  may  be)  than  those  of  a 
neighboring  locality.  Variation  of  wages  as  between  dif- 
ferent trades  and  occupations  is  in  a  large  number  of  cases 
explainable  by  the  custom  and  tradition  of  the  lines  of  work 
involved.  A  Massachusetts  Wage  Commission  has  asserted 
that  "wages  among  the  unorganized  and  lower  grades  of 
labor  are  mainly  the  result  of  tradition  and  of  slight  com- 
petition," ^  Employers  who  were  habituated  to  the  under 
payment  of  sweated  trades  were  sure  that  wages  could  not 
possibly  be  increased  above  the  customary  scale  until  the 
minimum  wage  laws  came  into  play,  defying  custom,  yet 
not  ruining  the  business.  Habit  and  custom  operate  in  and 
through  all  other  wage  influences.  Orthodox  ideas  of  wage 
figures  "which  the  business  will  bear"  established  notions 
of  what  constitutes  "a  fair  day's  pay  for  a  full  day's 
work,"  and  current  attempts  to  "adjust  wages  to  pre-war 
levels"  all  illustrate  the  scope  and  force  of  custom  in  the 
setting  up  the  wage  scale. 

The  groupings  of  wage  influences  which  have  been  made 

1  "Report  of  the  Commission  of  the  Minimum  Wage  Boards," 
January,  1912,  p.  18. 


134  Labor:  Its  Part  in  Production 

under  the  headings  of  standards  of  living,  incentives,  bar- 
gaining power,  and  habit  and  custom  are  not  exhaustive  in 
their  scope,  nor  do  they  exclude  the  influences  mentioned 
under  the  various  theories  of  wages  outlined  at  the  begin- 
ning of  the  wages  section.  The  primary  gain  from  these 
groupings  is  to  indicate  that  no  one  fixed,  absolute  prin- 
ciple is  adequate  to  explain  wages,  and  that  the  most  ade- 
quate theory  of  wage  standards  is  one  which  makes  room 
for  a  combination  of  numerous  and  variable  factors. 

To  search  for  any  one  principle  or  law  which  will  ac- 
count in  full  for  the  determination  of  wages  is  not  only 
futile,  but  is  a  tendency  to  depart  from  the  real  facts  of 
the  industrial  world.  A  large  variety  of  factors  are  con- 
stantly in  plaj^,  each  exercising  widely  differing  degrees  of 
influence  in  different  trades,  occupations,  and  communities. 
"Wages  are  the  resultant  of  the  multiplicity  of  forces.  In 
actual  bargaining  there  is  a  high  degree  of  guesswork  in 
ascertaining  the  proportionate  influence  of  each  factor. 
Much  of  th3  guesswork  is  capable  of  elimination  by  a 
frank  recognition  of  the  facts  of  the  worker's  life  and  an 
effort  at  scientific  measurement  along  lines  already  sug- 
gested. A  wage  theory  should  be  realistic,  should  fit  the 
facts  of  economic  life.  The  most  realistic  method  of  wage 
settlement  is  not  a  conception  of  some  one  wage  law  into 
which  wage  facts  of  all  sorts  and  varieties  must  be  made 
to  fit,  as  into  a  straight  jacket.  The  truly  realistic  key  is 
a  conception  of  the  full  list  of  wage  forces,  playing  widely 
varying  parts  from  instance  to  instance,  combining  in  new 
and  original  forms,  requiring  in  each  individual  case  an 
estimate  of  its  peculiar  and  unique  grouping  of  all  the 
forces  in  operation,  and  taking  on  new  and  differing  de- 
grees of  influence  in  national  and  international  wage  levels 
at  various  historical  stages.  At  the  same  time,  this  plural- 
istic or  group  theory  of  wages  has  the  distinct  advantage 
of  being  genuinely  serviceable  because  it  keeps  close  to  the 
evolutionary  and  dynamic  facts  of  economic  life. 

The  basis  of  this  theory  of  wages  in  actual  economic  con- 
ditions is  admirably  stated  by  one  of  the  most  influential 
labor  boards  in  this  country,  the  Railroad  Labor  Board,  in  a 


Labor:  Its  Part  in  Production  135 

decision  in  1920  on  the  wage  rates  of  approximately  2,000,- 
000  railway  employees :  ' '  The  board  has  been  unable  to  find 
any  formula  which  applied  to  the  facts  would  work  out 
just  and  reasonable  wages  for  the  many  thousands  of  posi- 
tions involved  in  this  dispute.  The  determination  of  such 
wages  is  necessarily  a  matter  of  estimate  and  judgment 
in  view  of  all  the  conditions,  a  matter  on  which  individuals 
will  differ  widely  as  their  information  or  lack  of  it,  their 
interest,  situation  or  bias  may  influence  them. ' '  ^  The 
Transportation  Act  passed  by  Congress  in  1920  laid  down 
as  a  guide  in  determining  what  wages  would  be  "just  and 
reasonable"  the  following  major  considerations: 

(1)  The  scale  of  wages  paid  for  similar  kinds  of  work 
in  other  industries; 

(2)  The  relation  between  wages  and  the  cost  of  living; 

(3)  The  hazards  of  the  employment; 

(4)  The  training  and  skill  required ; 

(5)  The  degree  of  responsibility; 

(6)  The  character  and  regularity  of  the  employment; 
and 

(7)  Inequalities  of  increases  in  wages  or  of  treatment, 
the  result  of  previous  wage  orders  or  adjustments. 

Wages  and  Labor  Efficiency 

Any  considerable  increase  in  the  real  wages  of  the  masses 
of  people  depends  upon  an  increase  in  the  total  productivity 
of  the  country.  Labor  may  make  gains  here  and  there  in 
squeezing  out  of  the  present  fund  of  production  some  of 
the  excessive  gains  which  go  to  profiteers,  but  any  sub- 
stantial progress  in  the  form  of  more  of  the  necessaries, 
comforts  and  luxuries  of  life  is  conditioned  upon  an  ad- 
vance in  the  productive  efficiency  of  the  whole  people.  On 
this  point,  the  careful  statistical  studies  of  "VV.  I.  King  are 
authoritative.  His  conclusions  are  stated  as  follows.^ 
"Thus  it  would  seem  improbable  that,  with  our  present 
national  productive  power,  any  feasible  system  of  dis- 
tribution could  increase  the  average  wage  earner's  income 

^Monthly  Labor  Bulletin,  Volume  XI.,  p.  101. 

2  "Wealth  and  Income  of  the  IVople  of  the  United  States." 


136  Labor:  Its  Part  in  Production 

in  purcliasing  power  by  more  than  one-fourth  and  this  is 
an  extreme  rather  than  a  moderate  estimate.  While  such 
a  change  might  or  might  not  be  desirable,  it  would,  at 
least,  work  no  startling  revolution  in  the  condition  of  the 
employees  of  the  United  States.  The  grim  fact  remains 
that  the  quantity  of  goods  turned  out  absolutely  limits 
the  income  of  labor  and  that  no  reform  will  bring  univer- 
sal prosperity  which  is  not  based  fundamentally  upon  in- 
creasing the  national  income."  King's  findings  were  based 
upon  pre-war  figures.  A  post-war  investigation  has  been 
made  by  David  Friday,  in  which  the  observation  is  es- 
sentially the  same.  "The  practical  conclusion  that  follows 
from  all  this  is  that  the  source  of  real  wages  must  be 
found  in  production  and  not  in  a  redistribution  of  the 
product  of  industry. 

"Those  who  had  hoped  to  augment  the  laborer's  real 
wages  by  making  short  shrift  of  the  whole  matter  and 
adding  to  the  laborer's  wages  what  the  entrepreneur  now 
receives  as  profits,  will  be  disappointed  by  this  analysis  of 
the  situation.  .  .  . 

"That  a  20  per  cent,  increase  in  productive  output  is 
possible  was  demonstrated  during  the  war.  That  the  co- 
operation of  labor  is  necessary  to  any  such  program  is 
obvious.  But  the  possibility  of  that  co-operation  was  also 
demonstrated.  Given  an  aim  that  appealed  to  the  imagina- 
tion, that  made  labor  an  integral  part  of  the  body  politic, 
it  demonstrated  its  willingness  to  co-operate.  But  there 
had  to  be  a  worthwhile  end,  and  there  had  to  be  recog- 
nition of  labor  as  a  factor  equal  to  the  other  partners  in 
the  industrial  life  of  the  nation. ' '  ^ 

In  other  words,  even  though  labor  should  plunge  en- 
thusiastically into  the  task  of  increasing  production  in  a 
measurable  degree  labor  might  have  no  assurance  that  a 

1  "Profits,  Wages  and  Prices,"  p.  236.  See,  however,  above,  page 
131,  for  an  analysis  of  the  basic  causes  of  restriction  of  production. 
It  is  necessary  to  realize  clearly  that  the  rational  correctness  of  this 
finding  cannot  be  expected  to  insure  a  transformation  in  labor 
behavior.  Labor  attitudes  toward  maximum  production  are  the 
outcome  of  every  instinctive  and  impulsive  industrial  influence  as 
vrell  as  of  appeals  to  reason. 


Labor:  Its  Part  in  Production  137 

due  proportionate  share  of  the  increase  would  be  forth- 
coming in  the  form  of  wages.  Labor  has  had  ample  bitter 
experience  in  the  past  to  satisfy  its  mind  that  there  are 
altogether  too  many  employers  who  would  pounce  upon 
labor's  increased  productivity,  and  endeavor  to  retain  the 
lion's  share  of  the  increase.  The  only  safeguard  against 
this  encroachment  which  has  thus  far  proved  reliable 
enough  to  command  the  widespread  confidence  of  labor  is 
collective  bargaining  through  a  powerful,  organized  labor 
group.  The  indispensable  understanding  in  labor's  mind 
before  any  material  increase  of  total  production  may  be 
looked  for,  must  be  that  labor  shall  receive  a  just  and 
proportionate  share  of  the  increase.  Unless  labor  can  be 
reasonably  assured  of  this  outcome,  labor  cannot  be  ex- 
pected to  take  part  in  the  ideal  of  greatly  heightened  out- 
put. Many  individual  plants  have  experimented  with  such 
assurances,  and  have  increased  production  in  many  cases 
by  surprising  amounts,  but  only  because  the  individual  em- 
ployer has  been  progressive  enough  to  comprehend  labor's 
point  of  view,  and  to  offer  assurances  fitting  the  individual 
plant,  which  convinced  labor  that  wages  would  constitute 
a  fair  and  proper  share  of  the  increased  product.  The 
number  of  employers,  however,  who  are  unable  because 
of  traditional  ways  of  thinking,  to  give  labor  such  an  as- 
surance is  so  great  that  on  a  national  scale,  the  laborer 
declines  to  trust  to  their  beneficence  to  dole  out  what  labor 
would  consider  a  fair  share  of  the  increased  product.  For 
the  general  run  of  laborers,  dealing  with  a  large  proportion 
of  employers,  the  only  satisfactory  assurance  lies  in  labor's 
power  to  claim  a  fair  share  of  the  increase,  through  agencies 
of  collective  bargaining.  Even  though  this  agency  may 
of-ten  make  exaggerated  demands,  and  appear  obstinate 
and  headstrong  and  unreasonable  in  its  claims,  neverthe- 
less the  only  sure  recourse  of  labor  is  collective  bargain- 
ing either  in  the  form  of  works  councils  or  labor  unions 
Democratic  action  in  government  or  industry  has  grave 
faults,  but  the  central  necessity  for  the  group  method 
exists  in  industry  as  well  as  in  politics,  and  the  besetting 
Bins  of  collective  bargaining  groups  must  be  alleviated  by 


138  Labor:  Its  Part  in  Production 

a  more  co-operative  attitude  on  the  part  of  labor,  capital 
and  the  public. 

Fully  aware  of  these  phases  of  labor  psychology,  Friday 
further  concludes:  "We  have  learned  that  it  is  possible 
to  produce  enough  so  that  every  class  may  have  a  decent 
standard  of  living.  With  this  result  realized,  poverty  will 
be  abolished.  This  attainment  is  one  of  which  nations 
have  dreamed  for  centuries.  No  nation  has  been  within 
striking  distance  of  its  realization  before.  If  any  national 
leader  or  any  group  can  be  found  with  the  imagination  and 
the  courage  to  appeal  to  America  on  the  basis  of  this 
motive,  and  with  an  adequate  program,  we  shall  see  the 
most  promising  and  worthwhile  political  and  industrial  ex- 
periment which  we  have  tried  in  our  national  career."^ 

Power 

It  is  true  that  labor's  part  in  production  is  concerned 
with  questions  of  function,  of  the  job,  of  wages,  of  hours. 
But  it  is  of  deeper  significance  that  all  of  these  separate 
demands  and  individual  movements  are  bound  up  with  a 
central,  pivotal  movement, — one  which  comprehends  the 
various  individual  claims,  and  integrates  the  thought  and 
action  of  labor  into  a  concentrated  purpose.  That  con- 
centrated purpose  is  a  new  status  in  industry.  The  new 
status  occupies  the  forefront  of  opinion  and  feeling  among 
the  laborers  of  the  country. 

The  transition  to  the  modern  industrial  organization, 
which  began  in  serious  proportions  during  the  middle  of 
the  nineteenth  century,  gave  to  the  worker  a  status  of  ob- 
vious inferiority.  He  became  a  hired  hand  in  the  factory 
and  railroad  and  mine,  with  no  material  control  over  the 
working  conditions  which  decided  the  destiny  of  his  life. 
The  regime  of  machine  production  denied  to  the  worker  a 
share  in  the  control  of  the  raw  product,  or  of  the  machinery 
for  production,  or  of  the  rewards  for  work,  or  of  the  amount 
of  work  to  be  done  per  day,  or  of  the  conditions  under 
which  work  had  to  be  done.  The  labor  problem  now  is  at 
bottom  an  effort  to  win  a  share  of  control  in  all  these 
1  "Profits,  Wages  and  Prices,"  p.  251. 


Labor:  Its  Part  in  Production  139 

matters  which  directly  affect  the  worker's  life.  It  has 
been  said  that  "The  root  evil  of  the  present  industrial 
order  is  that  it  affords  to  the  ordinary  worker  in  industry 
no  means  of  expression  and  no  chance  of  responsibility 
or  active  citizenship."  The  labor  movement  is  primarily 
committed  to  the  removal  of  this  root  evil,  and  to  the 
substitution  of  a  status  of  influence,  responsibility,  and 
expression. 

The  World  War  served  to  accelerate  the  movement.  The 
worker  was  definitely  told  that  he  counted  and  counted 
vitally  in  winning  the  war.  The  workshop  was  painted 
as  the  second  line  of  defense,  and  no  less  in  importance  than 
the  front  line  trench.  The  worker  was  told  that  the  war 
was  a  struggle  to  make  the  "world  safe  for  democracy." 
In  his  mind  and  his  experience,  the  world  often  nearly 
coincided  with  his  workshop,  and  to  him,  therefore,  the 
slogan  meant  that  the  war  was  to  make  "industry  safe 
for  democracy."  Such  hopes  stimulated  the  worker's 
instinctive  dispositions  of  self-assertion  and  self-expres- 
sion, and  set  loose  a  tide  of  human  energy  in  the  direction 
of  more  control  over  the  machine  regime.  Ex-Secretary 
of  Labor  Wilson  hinted  at  the  phenomenon  in  these  words : 
"Both  sides  must  realize  that  money  and  hours  are  but  in- 
cidents in  the  fight.  .  .  .  The  real  thing  which  is  being 
fought  over  by  employers  and  wage  workers  is  self-respect. 
The  employer  feels  that  he  cannot  give  up  for  fear  of  los- 
ing his  self-respect  and  prestige;  while  the  wage  workers 
feel  that  they  cannot  give  up  for  fear  of  losing  their  self- 
respect.  .  .  .  When  employers  will  give  as  much  thought  to 
studying  the  sentiments  which  control  life  as  to  studying 
materials,  machinery,  law,  and  other  factors,  then  we  shall 
be  on  the  road  to  industrial  peace." 

This  inner  change  which  is  affecting  society  goes  to  the 
heart  of  the  matter.  Surface  demands  for  new  wages, 
new  hours,  new  treatment  are  concrete  signs  of  the  funda- 
mental thing  itself, — a  new  assertion  of  the  worker's 
thought  and  power.  In  this  respect  there  has  been  an 
institutional  and  spiritual  change  going  on  in  social  and 
industrial  life.    The  mechanical  facts  of  the  working  worl(J 


140  Labor:  Its  Part  in  Production 

have  in  great  measure  outrun  the  traditional  ideas,  prin- 
ciples, and  organization  for  their  direction  and  control. 
The  facts  of  automatic  machines,  uninteresting  toil,  fatigue, 
long  hours,  bossy  foremen,  unreliable  wages,  advertised 
profits, — these  are  no  longer  taken  care  of  by  the  tradi- 
tional ideas  of  individual  action,  unrestricted  managerial 
power,  unbridled  freedom  of  contract,  individual  bargain- 
ing, non-consultation  between  employer  and  employee,  and 
' '  business  is  business. ' '  At  least,  they  are  not  cared  for  to 
the  satisfaction  of  the  worker.  Out  of  this  maladjustment 
between  the  mechanical  facts  and  the  traditional  principles 
of  industrial  government  has  grown  a  vivid  awakening  of 
instinctive  energies.  They  are  energies  which  crystallize 
into  new  principles  of  industrial  control, — of  industrial  self- 
control.  The  outcome  of  the  experience  has  been  the  formu- 
lation of  a  new  status  for  the  worker.  The  newly  projected 
ideas  call  for  group  action,  modified  managerial  power, 
collective  freedom  of  contract,  organized  bargaining,  joint 
conference  between  employer  and  employee,  and  "business 
is  self-expression."  Whatever  individuals  may  think  of 
the  soundness  or  viciousness  of  the  new  conceptions,  they 
are  in  our  midst  at  any  rate,  and  are  the  real  influences 
to  be  reckoned  with  in  any  serious  reflection  upon  labor's 
part  in  production. 

A  great  obstacle  in  the  path  of  these  instinctive  aspira- 
tions for  a  new  labor  status  is  the  defects,  excesses,  and 
abuses  in  labor  organizations  themselves.  Their  frequent 
abuses  of  power;  their  strikes  in  defiance  of  the  public 
need;  their  walking  delegates,  union  organizers  and  union 
leaders  often  lacking  in  self-discipline  and  in  a  due  regard 
for  the  legitimate  interests  of  employers  and  the  public; 
their  occasional  acts  of  violence;  their  reluctance  to  sur- 
render policies  for  restricting  production;  their  tendency 
to  harass  business  with  a  flood  of  limitations,  regulations 
and  by-laws;  their  rash  demands  from  time  to  time  in  col- 
lective bargaining  conferences;  their  occasional  repudia- 
tion of  contracts  with  employers, — all  need  to  be  brought 
under  control  before  the  public  or  employers  will  be  will- 
ing to  trust  labor  with  the  coveted  status  of  power.     All 


Labor:  Its  Part  in  Production  141 

of  the  excuses  and  explanations  for  such  abuses  which  can 
be  conceived  of  by  the  best  labor  minds  are  practically 
futile  as  a  means  of  convincing  the  rest  of  the  economic  or- 
ganization that  a  new  status  of  labor  power  is  safe.  The 
highest  ambitions  of  labor  will  certainly  be  opposed  and 
thwarted  in  countless  ways  by  the  public  as  well  as  employ- 
ers, until  labor  accepts  seriously  the  obligation  to  eliminate 
the  excesses  and  abuses,  which  are  now  all  too  prevalent 
in  labor  organizations.^ 

Environment 

The  environment  of  the  laborer  comprises  all  the  sur- 
rounding influences  upon  his  body  and  mind.  Within  the 
economic  environment  the  worker  spends  from  one-third 
to  one-half  of  his  waking  life.  The  influence  of  this  en- 
vironment upon  his  moods,  his  bodily  health,  and  his  human 
well-being  is  profound.  Good  wages  without  a  favorable 
environment  are  futile.  Reduced  hours  in  unsanitary  sur- 
roundings are  of  little  avail.  More  stable  employment  if 
the  employment  conditions  are  unsafe  for  life  and  limb  is 
without  real  gain. 

What  is  involved  in  environment?  What  is  at  stake? 
For  one  thing,  the  safety  of  the  worker.  In  a  recent  ad- 
dress, the  President  of  the  American  Society  of  Safety 
Engineers  put  the  case  comprehensively: 

"There  are  killed  accidentally  in  the  United  States  each 
year  about  70,000  people,  or  nearly  20,000  more  than  the 
total  battle  deaths  and  subsequent  deaths  from  wounds 
in  our  army  during  the  entire  European  War. 

"Of  the  wage  earners  in  this  country,  over  700,000  each 
year  lose  members  of  their  body  or  are  so  seriously  injured 
by  accidents  as  to  be  incapacitated  for  an  average  of  four 
weeks  each. 

"The  total  economic  waste  from  casualties  in  the  United 
States  amounts  to  probably  $800,000,000  per  year,  with  un- 
told privation  and  suffering  entailed, 

1  See  below,  Part  III,  Economic  Adaptation,  for  a  detailed  con- 
sideration of  the  dangers  and  benefits  of  the  relative  conceptions 
and  of  the  policies  and  practices  of  capital  and  labor  growing  out 
of  them. 


142  Labor:  Its  Part  in  Production- 

"About  90  per  cent,  of  this  yearly  casualty  expense,  or 
$720,000,000  is  caused  by  accidents  that  are  preventable 
by  engineering  provisions.  It  is  not  claimed  that  even  a 
large  portion  of  the  total  casualties  are  preventable  by  en- 
gineering provisions — only  7  per  cent. ;  but  it  is  this  7  per 
cent,  which  is  preventable  by  engineering  provision  that 
causes  the  $720,000,000  casualty  expense." 

With  the  development  of  high  power  and  high  speed  ma- 
chinery, the  network  of  electric  currents,  complicated 
chemical  processes,  the  use  of  compressed  air,  the  presence 
of  dangerous  gases,  acids  and  dusts  in  productive  proc- 
esses, extremes  of  temperature  and  humidity,  improper 
ventilation  and  unsanitary  surroundings,  night  work  and 
inadequate  lighting, — with  all  these  accompaniments  of  the 
modern  economic  process,  the  hazards  and  risks  to  the 
worker  have  mounted  high.  The  highest  death  toll  is  ex- 
acted in  the  mining  industry,  with  railroading,  electric  light 
and  power  industries  ranking  in  close  proximity. 

For  the  most  part,  a  remedy  for  such  hazards  has  come 
through  legislation,  state  and  national.  Labor  unions  have 
brought  pressure  to  bear,  and  a  Safety  First  movement 
voluntarily  adopted  by  employers  has  accomplished  much. 
However,  it  remains  true  that  for  a  considerable  portion 
of  industrial  establishments,  considerations  of  safety  and 
health  have  proved  to  have  only  a  secondary  appeal.  For 
that  portion,  legislative  compulsion  is  the  only  adequate 
guarantee  of  even  minimum  safety  and  health  conditions. 

Many  pioneer  employers  have  gone  far  beyond  consid- 
erations of  mere  safety  and  health  and  have  set  about 
making  the  working  environment  positively  attractive, 
comfortable,  stimulating.  The  plants  are  surrounded  with 
well-kept  lawns  or  beautiful  parks.  Landscape  and  build- 
ing architecture  become  an  economic  art.  Carefully  painted 
interiors,  neatness  and  cleanliness  in  the  care  of  build- 
ings and  the  arrangement  and  upkeep  of  machinery,  abun- 
dant window  space,  scientific  shading  and  illumination,  a 
medical  staff  with  doctors,  dentists  and  psychiatrists, 
hospital  and  dispensary  facilities,  playgrounds,  gardens, 
rest  rooms,  libraries,  company  stores,  gymnasiums,  night 


Labor:  Its  Part  in  Production  143 

schools,  even  universities, — these  are  a  few  of  the  improve- 
ments of  environment  which,  all  or  in  part,  are  tal?;en  up 
already  by  an  imposing  list  of  companies/  The  plan  in 
such  companies  is  linked  with  considerations  of  productive 
efficiency,  workers'  comfort,  plant  morale  and  loyalty,  and 
a  general  spirit  of  happiness,  prosperity  and  contentment 
in  the  whole  working  program.  The  gap  between  such  best 
kept  plants  and  the  worst  kept  plants  is  startling  and  sug- 
gestive. 

An  important  consequence  of  an  environment  of  this  im- 
proved type  lies  in  the  fact  that  it  offsets  in  a  real  measure 
the  monotonous  and  fatiguing  effects  of  the  production 
process.  The  handling  of  repetitive  machinery  may  be 
made  less  monotonous  by  surrounding  the  operator  with 
pleasant  and  stimulating  factory  accommodations.  The 
fatiguing  tendencies  of  the  length  of  the  work  day  are  in  a 
measurable  way  reduced  by  clean,  artistic,  healthy  work- 
rooms. The  spirit  of  the  worker  cannot  rise  above  the 
tone  of  the  plant  yards,  the  lighting  system,  the  mechanical 
arrangements.  But  if  the  laborer  has  a  pleasant  place  to 
work  in,  his  spirit,  interest,  morale  and  efficiency  tend  to 
improve.  This  outcome  is  broadly  stated  by  R.  A.  Spaeth  in 
these  words:  ''When  working  conditions  are  standardized 
and  we  have  the  best  of  light  and  heat  and  ventilation; 
when  all  workers,  men  and  women,  have  recess  periods 
and  properly  adjusted,  comfortable  chairs ;  when  plants  are 
equipped  with  cafeteria  in  which  workers  buy  an  occa- 
sional plate  of  soup  instead  of  the  more  popular  pie  and 
ice  cream;  when  the  labor  unions  and  managers  alike  in- 
sist upon  physical  examination  of  all  employees;  when  job 
analysis  and  tests  for  physical,  physiological  and  psycho- 
logical fitness  once  get  on  speaking  terms ;  when  the  indus- 
trial engineer  stops  fooling  himself  by  comparing  task 
setting  with  astro-physics  and  appreciates  that  his  open 
sesame  is  not  the  stop-watch  but  the  square-deal — then 

1  Corporations  which  have  tried  out  these  constructive  devices  are 
such  as  the  National  Lamp  Works,  the  National  Cash  Rpp;ister 
Company,  the  Goodyear  Tire  and  Rubber  Company,  the  Endicott 
Johnson  Company,  the  Eastman  Kodak  Company  and  the  Proctor 
&  Gamble  Company. 


144  Labor:  Its  Part  in  Production 

and  not  till  then,  will  the  question  of  fatigue  no  longer 
be  of  such  moment  as  it  is  generally  considered."^ 

In  the  broadest  sense  of  the  word,  the  economic  environ- 
ment covers  pretty  much  the  entire  content  of  the  work- 
er's experience  while  he  is  on  the  job.  For  this  reason, 
the  environment  serves  as  a  stimulus  to  a  wide  variety  of 
instincts  in  the  worker's  makeup.  The  financial  instincts 
which  are  encouraged  by  various  devices  have  already  been 
mentioned  under  the  section  on  wages  and  financial  in- 
centives. It  is  necessary  now  to  consider  some  of  the 
non-financial  incentives  which  enter  into  the  worker's  in- 
stinctive behavior.  The  following  list  of  non-financial  in- 
centives is  by  no  means  complete,  but  should  be  suggestive : 

1.  An  incentive  to  devotion  to  the  laborer's  duties  is 
found  in  giving  the  laborer  information  about  the  pro- 
ductive process.  Standing  at  his  one  machine,  making  but 
one  isolated,  mlrelated  part  of  the  finished  product,  the 
worker  attaches  little  significance  to  his  operations.  What 
is  it  all  about  ?  He  does  not  know.  But  along  comes  an  in- 
dustrial engineer  to  draw  up  diagrams  and  charts  which 
present  vividly  and  clearly  to  the  worker  the  part  which 
his  individual  touch  plays  in  the  formation  of  the  finished 
article.  Perhaps  a  moving  picture  of  the  whole  manu- 
facturing process  is  made  and  presented  to  an  audience  of 
workers.  Talks  by  executives  are  used  to  explain  the 
scheme  of  manufacture.  The  worker  is  thus  able  to  dis- 
cover the  ultimate  meaning  and  significance  of  his  work. 
' '  Interest  in  a  thing  may  be  developed  by  means  of  extend- 
ing information  about  it.  .  .  .  In  applying  this  in  indus- 
try, one  would  tell  the  employees  many  things  about  the 
business,  soaking  them  in  facts  to  the  point  of  saturation. 
...  To  inculcate  a  deep  affection  and  loyalty  toward  the 
firm,  give  information  about  its  beginnings  and  growth."^ 

From  a  thoroughly  practical  viewpoint  as  an  indus- 
trial engineer,  C.  E.  Knoeppel  states,  "Wherever  far- 
sighted  executives  have  widened  the  vision  of  their  work- 

^  Industrial  Management,  May,  1920,  p.  411. 

2  H.  D.  Kitson,  Journal  of  Political  Economy,  Volume  28,  pp. 
332-33G. 


Labor:  Its  Part  in  Production  145 

men  by  explaining  the  relation  of  their  work  to  the  whole 
plant,  a  better  and  more  nearly  normal  relationship  has 
followed."^ 

2.  Another  incentive  has  been  discovered  in  the  practice 
of  frankness  with  the  workers  about  the  hitherto  concealed 
facts  of  the  business.  Government  representatives  enlisted 
the  support  of  the  I.  W.  W.  lumbermen  of  the  Northwest 
during  the  War  by  having  the  owners  open  their  books 
and  show  the  costs  and  profits  of  the  business.  A  number 
of  concerns  voluntarily  take  leaders  of  the  workers  into 
their  confidence  on  the  ups  and  downs  of  the  business,  and 
this  factor  of  candid  consultation,  and  frank  give  and  take 
of  information  about  the  profit  and  loss  phases  of  the 
company  policy  establishes  a  mutual  confidence  and  under- 
standing which  serves  as  a  powerful  incentive  to  loyalty 
and  interest  on  the  part  of  the  worker. 

3.  Incentives  are  possible  only  when  the  worker  feels 
that  his  new  interest  in  the  enterprise  will  not  be  ex- 
ploited to  the  undue  selfish  advantage  of  the  employer.  As 
is  pointed  out  by  Tead  and  Metcalf,  "There  is,  finally,  the 
fear  of  exploitation  if  interest  in  work  is  pushed  to  a  point 
where  the  employer  gets  a  much  larger  proportionate  re- 
turn for  increased  product  than  the  worker.  .  .  .  The 
arousing  of  interest  is  not  synonymous  with  efforts  to  '  speed 
up'  production,  to  cut  wage  rates,  to  increase  profits.  At 
that  moment  when  workers  feel  they  are  being  tricked  into 
interest  in  work  in  order  that  their  employer  may  get  added 
returns,  the  game  will  be  up  with  the  employer."  One  of 
the  surest  ways  in  which  the  impression  of  trickery  can 
be  given  is  the  all  too  prevalent  device  of  cutting  piece 
rates  when  an  increase  of  production  takes  place.  If  the 
worker  is  satisfied  that  a  proper  share  of  the  increased 
output  will  come  his  way,  there  is  something  to  fire  his 
imagination.  The  integrity  and  squareness  of  the  employer 
is  of  itself  a  genuine  non-financial  incentive. 

4.  Stability  of  employment  is  a  loyalty  incentive  when 
the  worker  sees  that  the  employer  is  concerned  with  his 
interest  to  the  extent  of  making  every  effort  to  eliminate 

1  The  Nation's  Business,  April,  1921,  p.  17. 


146  Labor:  Its  Part  in  Production 

seasonal  shut-downs,  and  to  keep  going,  even  if  only  on 
part  time,  when  business  is  slow.  The  worker  has  a  reason 
for  a  reciprocal  attitude  toward  the  employer.  Loyalty  to 
the  worker  in  the  form  of  maintaining  a  steady  job  be- 
gets loyalty  to  the  employer  in  the  form  of  interest  in  the 
job.  To  secure  this  incentive,  management  must  convince 
the  worker  that  it  is  doing  its  best  to  give  him  an  unin- 
terrupted chance  to  earn  a  living. 

5.  Rivalry  is  stimulated  by  posting  the  records  of  pro- 
duction for  individuals  and  for  groups.  When  men  can 
see  their  efficiency  rated  side  by  side  with  that  of  their 
fellow  workers,  it  becomes  a  matter  of  pride  to  come  near 
the  head  of  the  list.  Moreover  records  which  indicate  the 
quality  of  the  finished  product  and  the  amount  of  spoiled 
goods  tend  to  foster  a  real  pride  of  craftsmanship.  An- 
other form  of  record  gives  the  worker  his  comparative 
efficiency  to-day  and  a  year  ago  to-day,  with  the  result 
that  he  tends  to  take  pride  in  progress  in  his  skill. 

6.  Fitting  the  worker  to  the  job  by  intelligence  tests, 
ability  tests,  job  specifications  studies,  and  efficiency  rat- 
ings, makes  possible  a  harmony  between  the  human  factor 
and  the  machine  factor,  which  tends  to  heighten  interest 
in  the  job.  In  the  first  flush  of  enthusiasm  for  psychological 
tests,  experts  overestimated  their  value  considerably.  Their 
usefulness  is  thus  far  confined  to  certain  highly  specialized 
tasks,  such  as  clerical  work,  inspection  tasks,  salesman- 
ship, and  tasks  where  acuteness  of  hearing  or  vision  are  of 
vital  importance.  The  tests  themselves,  such  as  the  Binet, 
the  army,  and  special  industrial  forms,  are  in  a  far  from 
completed  shape  for  full  industrial  applications.  The 
correlation  between  tests  and  subsequent  showings  of  effi- 
ciency indicate  that  the  tests  are  not  a  sure  indication  of 
trade  ability,  but  at  most  point  to  a  probable  efficiency  or 
inefficiency.  Hence  they  have  to  be  used  w'ith  wide  leeway 
for  judgment  and  common  sense  on  the  part  of  the  em- 
ploj^er.  Then  effective  use  requires  administrators  who 
have  had  special  psychological  training.^  Purely  psycho- 
logical tests  need  to  be  supplemented  by  physical,  medical 

1  H.  D.  Kitson,  School  Rrrieu-,  Volume  XXIV,  No.  3,  March,  1916. 


Labor:  Its  Part  in  Production  147 

and  physiological  tests  to  discover  the  endurance  of  the 
worker  under  the  working  conditions  of  the  occupation  in 
which  he  is  to  be  placed/ 

7.  Transfer  and  promotion  are  practicable  aids  to  sound 
labor  incentives.  Henry  Ford  states  that  the  repetitive 
machinery  of  automobile  manufacturing  would  drive  the 
workers  crazy  unless  they  were  given  variety  at  right  in- 
tervals by  transfer  from  one  type  of  machine  to  another,  or 
from  one  department  to  another.  Transfer  thus  serves  to 
alleviate  monotony.  Again,  if  a  worker  is  found  inefficient 
at  one  type  of  work,  the  scientific  solution  is  proving  to  be 
to  try  the  man  out  at  other  types  until  he  gets  the  right 
sort  of  task  for  his  peculiar  nature.  If  he  is  at  odds  with 
the  foreman  of  one  department  he  may  be  transferred  to 
another  foreman.  These  policies  secure  the  confidence  of 
the  worker  and  are  a  substitute  for  a  former  policy  of 
discharge  the  instant  the  man  proved  incompetent.  At 
each  job  held,  efficiency  reports  may  be  made,  based  on 
piece-rate  records,  quality  of  work,  judgment  of  foremen 
and  superintendents,  character  traits,  attitude  toward 
work,  etc.  These  ratings  can  be  used  from  time  to  time 
as  the  basis  of  promotions.^  "Many  organizations  lose  a 
considerable  degree  of  the  enthusiasm  and  zeal  they  might 
command  by  failing  to  make  it  apparent  that  they  will 
recognize  merit  and  advance  the  ambitious.  .  .  .  Any  trans- 
fer or  promotion  plan  which  is  to  be  permanently  sound 
should,  therefore,  meet  this  test :  Does  the  plan  stimulate 
and  draw  out  the  desire  of  people  to  be  creative,  to  be  in- 
terested in  their  own  activity,  to  excel,  to  win  approval,  to 
develop  in  power  of  self-expression  ? "  ^ 

8.  A  great  number  of  employers  have  set  up  organ- 
ization machinery  which  invites  and  encourages  the  sug- 
gestions, viewpoints,  and  opinions  of  workers.  The  de- 
vices of  labor  representation  are  various  in  kind,  but  in 
all  their  variety,  are  based  upon  the  value  of  evoking  the 
mental  activity  of  the  workers.     Joint  conference,  consulta- 

1  R.  W.  Kelley,  "Hiring  the  Worker,"  pp.  91-97. 

2  Ibid.,  Chapter  VITT. 

3  Tead  and  Metcalf,  "Personnel  Administration,"  pp.  228-235.  See 
also,  R.  A.  Spaeth,  Industrial  Management,  March,  1920,  pp.  213-217. 


148  Labor:  Its  Part  in  Production 

tion,  discussion,  all  serve  to  clear  up  misunderstandings, 
to  create  a  new  feeling  of  dignity  and  self-respect  on  the 
part  of  the  worker,  to  develop  a  sense  of  responsibility  and 
self-control,  and  most  important  of  all,  to  build  up  a  feel- 
ing that  the  interests  of  the  worker  are  one  with  the  in- 
terests of  the  employer. 

9.  The  morale  of  the  workers  has  been  elevated  by  the 
improvement  of  the  environment  of  the  workers.  Attrac- 
tive homes,  hospital  care,  recreational  facilities,  pleasant 
factory  conditions  have  their  psychological  reactions  upon 
all  the  instincts  of  the  worker.  By  encouraging  a  psycho- 
logically abundant  life,  the  worker  develops  a  higher  per- 
sonality and  simultaneously  proves  a  steadier  and  higher 
material  efSciency. 

10.  "Men  must  get  the  feel  that  they  are  working  for 
efficient  managers  if  they  are  going  to  be  interested  in 
increasing  production."^ 

Especially  must  the  workers  feel  that  the  management 
is  intelligently  and  scientifically  handling  the  personnel  side 
of  the'  organization.  To  quote  Meyer  Bloomfield,  "When 
everji;hing  that  present-day  science  can  suggest  in  the  way 
of  improving  technical  efficiency  in  systems  of  cost  keeping, 
equipment,  machinery,  and  material  has  been  adopted,  the 
biggest  of  all  industrial  problems  remains  to  be  faced. 

"As  we  have  seen,  this  is  the  problem  of  handling  men. 
Every  awalvened  employer  knows  that  managing  employees, 
selecting,  assigning,  directing,  supervising  and  developing 
them,  is  the  one  phase  of  management  which  is  most  diffi- 
cult and  complicated."^ 

To  perform  this  important  function,  a  new  profession 
has  come  into  being  within  the  last  few  years,  that  of  em- 
ployment management  or  personnel  administration.  The 
manager  of  this  department  of  the  business  conceives  of  the 
human  factor  as  a  problem  calling  for  scientific  analysis  of 
every  phase  of  the  employment  relationship.  The  conse- 
quent good-will  and  mutual  understanding  are  the  results 
of  the  incentives  aroused  in  the  laborer 's  mind. 

T- (Purvey,  March  5,  1921,  p.  817. 

2  Kelley,   "Hiring  the  Worker,"  p.  9. 


Labor:  Its  Part  in  Production  14.9 

This  list  does  not  in  any  sense  exhaust  the  non-posses- 
sive incentives  possible  in  the  processes  of  production. 
They  illustrate  a  number  of  the  possibilities.  There  are 
so  many  things  which  count  in  the  worker's  life  besides  the 
amount  of  his  income  that  economic  principles  based  upon 
the  assumption  that  the  laborer  is  a  one-motive  being, — and 
that  motive  purely  mercenary, — have  gone  far  astray.  The 
non-possessive  instincts,  when  properly  called  out,  build  up 
a  better  balanced  life  for  the  worker  and  supply  the  em- 
ployer with  a  producer  whose  heart  is  in  his  work. 

The  Mind  of  the  Worker 

The  following  description  of  labor's  ideas  is  only  a  de- 
scription, not  an  argument.  The  purpose  is  to  picture  the 
ideas  as  accurately  as  possible  without  condemnation  or 
approval.  Moreover  it  would  be  false  to  claim  that  any 
single  set  of  ideas  prevails  uniformly  throughout  the  labor 
group.  However,  after  full  allowance  has  been  made  for 
the  variations  of  opinion  and  extremes  of  radicalism  and 
conservatism  which  exist  throughout  the  labor  world,  there 
is  obvious  a  strong  degree  of  likemindedness  among  the 
workers.  This  likemindedness  is  particularly  impressive 
in  that  section  of  the  labor  group  which  is  dynamic, — 
that  section  which  believes  in  change  for  the  better  and 
which  in  one  degree  and  another  is  constantly  bringing 
pressure  to  bear  in  favor  of  economic  change.^ 

First  of  all,  in  labor's  mind,  management  is  inefficient. 
The  notion  that  management  has  any  magic  capacity  for 
high  efficiency  is  rudely  dismissed.  In  all  but  exceptional 
factories  the  workers  see  in  the  course  of  the  everyday 
tasks  constant  illustrations  of  management's  blunders. 
They  see  no  small  number  of  ways  in  which  machinery 
could  be  better  arranged,  delays  avoided,  waste  elimi- 
nated, good-will  stimulated,  and  better  production  se- 
cured. In  the  past,  labor's  suggestions  and  ideas  on  such 
matters  have  too  often  been  spurned  by  management.  "An 
employer  will  tell  you  in  one  breath  that  he  will  stand  no 

1  See  Samuel  Gompers's  "Labor  and  the  Common  Welfare,"  also 
"Labor  and  tlie   Employer," 


150  Labor:  Its  Part  in  Production 

interference  with  'his'  business,  and  in  the  next  that  his 
employees  take  no  interest  in  that  business.  Of  course  they 
don't.  They  haven't  any  interest.  They  are  unconsulted 
outsiders.  .  .  .  What  incentive  have  wage  earners  to  take 
a  personal  interest  in  the  problems  of  industry,  when  no- 
body asks  their  advice,  and  everybody  resents  it?"  In 
many  of  the  affairs  of  labor,  the  foreman  stands  in  the 
laborer's  eyes  for  the  whole  of  management.  The  foreman 
is  management's  immediate  representative  on  the  ground. 
"At  any  rate,  the  worker  is  not  to  be  blamed  if  he  con- 
siders his  driving  foreman,  or  that  grouchy  gate  police- 
man, or  that  mean-minded  paymaster,  or  his  pompous  clerk 
quite  as  fully  and  as  properly  a  representative  of  the 
company's  real  purposes  as  the  solicitous  employment 
manager  or  the  friendly  nurse.  "^  The  workers  see  no  rea- 
son why  the  management  should  not  supply  "better  jobs 
and  steadier  jobs,  less  tiring  jobs,  jobs  whose  human  service 
is  better  understood,  jobs  with  a  better  chance  to  enjoy  the 
satisfactions  of  their  doing,  without  these  being  lessened  by 
a  grasping  foreman  representing  an  unknown  employer."* 
The  foreman,  the  boss,  the  paymaster,  all  stand  for  the 
management  in  the  eyes  of  the  laborer,  and  their  arbitrari- 
ness, or  unreasonableness,  or  blindness,  or  incapacity,  or 
stupidity  represent  the  qualities  of  the  management.  Fur- 
ther than  this,  labor  nurses  the  idea  that  management  is 
guilty  of  one  great  inefficiency  which  is  almost  criminal, 
namely,  the  inefficiency  represented  in  unstable  employ- 
ment. That  management  should  boast  of  marvelous  skill 
and  efficiency  and  at  the  same  time  be  unable  to  avert 
shut-downs,  seasonal  tie-ups,  periods  of  depression,  indus- 
trial breakdowns  following  overproduction  appears  to 
labor  to  be  proof  of  inexcusable  incompetency.  Labor  be- 
lieves that  such  phenomena  appear  largely  because  of 
management's  consideration  of  "profits  first."  In  this 
attitude,  labor  is  encouraged  by  industrial  engineers 
and  experts,  whose  constant  complaint  is  that  a  large  part 
of  production  is  not  more  than  fifty  per  cent,   efficient. 

1  Whiting  Williams,  "What's  on  the  Worker's  Mind?"  p.  290. 

2  Ibid.,  p.  317. 


Labor:  Its  Part  in  Production  151 

There  is  consequently  a  strong  effort  on  the  part  of  labor 
to  ally  itself  with  the  engineers  and  their  philosophy. 
Thus,  growing  out  of  experiences  year  in  and  year  out, 
labor  has  come  to  feel  that  management  has  no  monopoly 
upon  the  knowledge  of  productive  efficiency  and  that  in 
many  problems  of  the  workshop  labor  is  as  wise  as  manage- 
ment. Reverence  and  awe  for  management  as  a  genius 
of  masterful  efficiency  has  been  shattered. 

Secondly,  in  labor's  mind  the  owners  of  property  are 
to  a  large  extent  engaged  in  the  game  of  getting  something 
for  nothing.  Labor  does  not  entertain  the  socialist  doc- 
trine that  ownership  is  not  entitled  to  an  income.  Labor's 
idea  is  that  a  large  part  of  the  income  which  o-WTiership 
actually  wins  is  undeserved,  unearned,  and  excessive.  The 
great  prominence  given  to  the  facts  of  profiteering  in  recent 
years  has  accentuated  this  impression.  Moreover,  labor 
believes  that  this  profit  motive  of  property  owners,  being 
carried  to  an  extreme,  is  the  cause  of  a  large  proportion  of 
industrial  woes.  As  things  stand,  labor  conceives  that  in- 
dustrial organization  is  for  profit  instead  of  for  use,  for 
dividends  instead  of  for  production  or  service.  "There  is 
a  general  conviction  among  thoughtful  workers  that  the 
present  world  works  badly;  that  unemployment,  poverty, 
ignorance,  social  injustice  are  things  which  intelligent  con- 
trol and  ordinary  good  human  intentions  could  prevent  if 
only  there  was  a  will  and  the  desire  that  they  he  'pre- 
vented.'''^ The  owners  are  thought  to  have  a  primary  con- 
sideration constantly  for  profits  and  only  a  secondary,  a 
remotely  secondary  consideration  for  labor's  best  interests. 
The  owners  are  charged  with  admitting  only  a  minimum 
obligation  or  responsibility  to  labor.  In  turn,  labor  feels 
no  strong  sense  of  obligation  or  responsibility  to  owners. 
The  weak  loyalty  of  labor  toward  the  owners  is  more  than 
matched,  so  labor  thinks,  by  the  disloyalty  of  owners 
toward  labor.  It  is  an  apt  figure  of  speech  that  the  cor- 
poration has  no  soul.  The  legal  precept  fits  the  moral  fact 
of  the  case,  in  labor's  eyes.  The  assumption  which  has 
been  traditional  since  the  days  of  Adam  Smith  that  the 
1  F.  Tannenbaum,   'New  Republic,  Vol.   XXIII,  p.    172. 


152  Labor:  Its  Part  in  Production 

incidental  by-product  of  profit  seeking  is  always  some 
good  for  the  community  finds  no  credence.  Labor  has 
seen  too  many  examples  to  the  contrary.  Moreover, 
ownership  need  not  boast  that  profits  are  a  reward  for 
managerial  ability.  Labor  asks,  "Do  managers  receive  the 
profits?"  Obviously  not.  Managers  receive  a  salary. 
With  all  these  notions,  the  awe  of  property  dies.  Kev- 
erence  for  ownership  as  something  sacred  and  religious 
passes  out.  "Certain  ideas  one  believes  to  be  knit  into 
the  fiber  of  the  people.  Suddenly  they  fall  away — out- 
worn shells.  .  .  .  Reverence  for  the  gentry,  for  the  privi- 
leged, for  the  idle,  has  withered.  With  the  idea  gone,  the 
institutions  built  upon  it  go.  ...  In  my  opinion,  this 
change  is  the  most  profound  in  its  grip  on  instinct,  the 
most  far-reaching  in  its  consequences  of  any.  All  other 
changes  wait  on  that,  and  follow  from  that."^  The  in- 
stincts of  labor  refuse  to  pay  homage  to  the  acquisitiveness 
of  property.  The  spirit  of  the  workers  ceases  to  be  afraid 
of  the  inalienable  and  immutable  principles  of  profit  mak- 
ing. "A  growing  proportion  of  mankind  believes  that 
industry  should  be  managed  primarily  for  those  who  work, 
not  for  those  who  own. "  -  It  is  natural  under  the  circum- 
stances that  labor  should  get  the  notion  that  the  owners  of 
the  property  are  unsympathetic.  To  believe  that  the  busi- 
ness is  a  partnership  between  labor  and  capital  is  difficult, 
and  the  outcome  of  the  whole  matter  is  that  "those  who 
work  are  fighting  those  who  own.  The  workers  no  longer 
think  that  the  shareholders  are  wiser  than  they."  Labor's 
ideas  are  by  no  means  complimentary  to  capital  OAvners. 
They  are  exceedingly  harsh  and  critical,  and  all  the  more 
so,  because  of  the  instinctive  drive  behind  them. 

In  the  third  place,  labor  thinks  of  the  market,  the  whole 
organization  of  buying  and  selling  commodities,  as  some- 
thing rigged  and  manipulated  by  obscure  strategists.  In 
selling  his  labor  as  an  individual  to  an  employer  a  laborer 
feels  that  he  is  at  a  disadvantage ;  and  as  a  consumer  in  a 
grocery  store  or  butcher  shop,  he  gathers  about  the  same 

1  Arthur  Gleason,   "What  the  Workers  Want,"  p.  251. 

2  See  R.  H.  Tawney,  "The  Acquisitive  Society." 


Labor:  Its  Part  in  Production  153 

impression.  He  conceives  a  long  line  of  superfluous  middle- 
men, an  army  of  price  boosters,  cliques  of  hoarders,  and 
parties  to  price  agreements;  and  matched  against  the  wits 
of  such  an  array  of  market  manipulators,  he  feels  helpless 
and  inadequate.  In  his  mind  the  whole  process  is  not 
maintained  primarily  for  the  sake  of  serving  the  labor  con- 
sumer but  for  the  sake  of  lining  the  pockets  of  acquisitive 
dealers.  However  unfair  such  a  conception  may  appear  to 
some  outsiders,  it  is  beyond  dispute  that  such  a  conception 
is  widely  held  among  laborers. 

In  the  fourth  place,  labor  conceives  of  finance  as  some 
secret,  far-reaching  process  of  scheming.  The  institutions 
of  banking,  speculation,  exchange,  credit,  and  Wall  Street 
appear  as  a  conspiracy  of  interlocking  directorates,  secret 
understandings,  and  mysterious  quiet  powers  which  hold 
a  whiphand  over  the  whole  productive  organization.  The 
railroad  brotherhoods  brought  charges  that  a  gigantic  con- 
spiracy of  big  banks  deliberately  fostered  the  post-war 
business  depression  for  the  sake  of  drawing  the  teeth  out 
of  labor's  war-gained  powers.  The  House  of  Morgan  is 
a  by-word  for  the  subtle  and  dangerous.  Labor  believes 
that  it  detects  financiers  as  the  powers  behind  the  throne 
in  most  big  labor  controversies.  Strikes  in  the  steel,  coal, 
and  railroad  industries  have  shown  up,  so  labor  is  con- 
vinced, the  big  bankers  interested  in  those  industries  as  the 
real  antagonists.  The  craft  and  strategy  which  labor  at- 
tempts to  overcome  has  its  source  in  the  shrewdness  and 
sagacity  of  these  silent  financial  directors  of  the  industrial 
life  of  the  nation.  This  is  not  to  deny  that  the  lending  of 
money,  and  the  protection  of  deposits  is  an  important 
economic  servic-e.  Labor  simply  asserts  that  the  terms 
upon  which  the  service  is  rendered  bodes  labor  no  good 
and  unduly  restricts  and  shackles  productive  enterprise. 

Fifth,  labor  believes  that  the  law  is  not  on  its  side.  It 
believes  that  the  law  has  all  too  often  been  unfair.  In- 
junctions, court  decisions,  restraints  from  picketing,  and 
from  boycotting,  assessment  of  damages,  limitations  of 
rights, — these  are  but  a  few  of  the  methods  of  the  law 
which  give  labor  an  unfortunate  position.    "From  time 


154  Labor:  Its  Part  in  Production 

to  time,  American  "workingmen  have  also  raised  their 
voices,  but  ineffectually,  in  favor  of  the  simplification  of 
our  legal  system.  They  have  protested  against  the  legal 
technicality  which  American  lawyer  legislators  have  de- 
lighted in  inserting  into  the  statutes  and  the  rules  govern- 
ing court  procedure.  They  have  also  protested  against 
the  emphasis  which  the  legal  mind  places  upon  precedent, 
because  precedent  is  necessarily  a  handicap  upon  any  class 
struggling  upward  toward  a  plane  of  equality  with  other 
classes.  "1  Moreover  the  favorite  doctrines  of  the  law  such 
as  the  natural  and  inalienable  rights  of  private  property, 
individual  liberty,  free  contract,  and  free  competition,  run 
at  cross-purposes  with  the  instinctive  desires  of  labor. 
If  the  labor  movement  means  anything,  it  means  a  denial 
that  private  property  has  rights  which  are  superior  to 
personal  rights,  and  that  private  property  is  above  and 
beyond  restriction  and  restraint.  It  means,  too,  that  indi- 
vidual liberty  for  an  employee  is  a  mockery  and  that  unless 
the  doctrines  of  individual  liberty  are  supplemented  by 
new  doctrines  of  group  liberty  and  unless  the  individual 
bills  of  rights  can  be  supplemented  by  group  bills  of  rights, 
the  word  liberty  cannot  mean  much  to  labor.  In  labor's 
mind  freedom  of  contract  means  the  freedom  of  the 
employer  to  pay  as  low  a  wage  as  possible  and  exact  as 
high  a  working  output  as  possible.  The  law  is  not  con- 
cerned with  the  problem  of  whether  such  freedom  of  con- 
tract results  in  inadequate  wages  or  excessive  fatigue.  So 
long  as  freedom  of  contract  exists  the  law  does  not  worry 
greatly  about  the  consequences.  Hence,  the  law  in  labor's 
mind  has  not  been  brought  up  to  date.  The  courts  stand 
as  a  bulwark  for  the  protection  of  property  rights,  but 
in  labor's  eyes  are  exasperatingly  indifferent  to  the  human 
rights  of  labor.  The  sacred  prestige  of  the  law  comes  into 
serious  question.  The  necessities  of  the  worker  who  spends 
his  eight  or  ten  hours  at  a  machine  are  direct,  simple,  and 
clear.  The  laborer  feels  them  often  blindly,  instinctively. 
He  knows  the  consequences  of  monotony  and  of  fatigue,  of 
wage  rates  and  bad  foremanship,  of  industrial  peace  and 
1  F.  T.  Carlton,  "Organized  Labor  in  American  History,"  p.  200. 


Labor:  Its  Part  in  Production  155 

industrial  war.  They  are  close  realities  which  fire  primi- 
tive instincts  and  set  off  rugged  impulses.  Traditional 
rights,  legal  conceptions,  court  doctrines  which  thwart 
these  direct  and  simple  instinctive  necessities  crumple  in 
the  conflict.  '  The  mechanistic  facts  of  the  shop  brush 
aside  the  elaborate  legal  taboos  and  roughly  tear  down  the 
shrines  of  judicial  idols  which  fitted  the  facts  of  life  a 
century  ago  but  which  so  far  as  the  laborer  can  see  are 
grossly  out  of  joint  with  the  facts  of  life  to-day.^ 

As  a  sixth  consideration,  labor  does  not  feel  that  the 
public  is  an  active  ally.  As  an  impartial  arbiter  of  clashes 
of  opinion,  and  of  industrial  struggles,  the  public  seems  pri- 
marily interested  in  getting  the  trouble  settled  at  any  cost. 
Industrial  peace  at  any  price  is  the  foremost  consideration 
and  if  it  is  necessary  that  justice  to  labor  be  sacrificed  some- 
what the  public  is  not  greatly  alarmed  at  the  sacrifice. 
Labor  conceives  that  the  public  is  more  interested  in  peace 
than  in  a  square  deal  to  labor.  Moreover,  by  the  very  na- 
ture of  things  the  labor  movement  feels  on  the  aggressive, 
whereas  employers  are  on  the  defensive.  In  most  cases 
of  antagonism  the  sympathy  of  the  onlooker  instinctively 
goes  out  to  the  defender.  In  industrial  affairs,  labor,  be- 
ing on  the  aggressive,  makes  the  attack,  and  for  obvious 
psychological  reasons,  thereby  tends  to  alienate  the  sym- 
pathy of  the  "long-suffering  public."  Labor  therefore 
considers  itself  justified  in  pushing  ahead  even  though  it 
may  necessitate  some  jostling  of  the  complacent  public. 
Labor's  justification  for  its  militancy  and  aggressiveness 
is  the  natural  instinctive  outcome  of  its  feeling  that  it  is 
an  oppressed  class.  Labor  sees  it  a  duty  to  shake  things 
loose  and  win  progress  in  spite  of  the  lethargy  and  inertia 
of  the  public.  In  this  effort  labor  finds  itself  at  a  disad- 
vantage because  the  information  upon  which  public  opinion 
is  based  comes  from  newspapers  which  to  labor's  mind  do 
not  present  labor's  side  of  the  case  fairly.  Labor  thinks 
it  has  no  way  of  getting  its  case  outlined  clearly  in  the 
eyes  of  the  public,  and  consequently  the  voice  of  the  public 

1  See  E.  F.  Hoxie,  "Trade  TTnioniFim  in  the  United  States."  Chap. 
IX,  also  T.  Veblen,  "Theory  of  Business  Enterprise,"  pp.  328,  342. 


156  Labor:  Its  Part  in  Production 

is  far  from  the  voice  of  God.  This  set  of  ideas  is  of 
course  not  a  matter  of  wilful  disrespect,  but  is  an  instinc- 
tive rationalization  with  antecedents  in  the  hard-felt  inter- 
ests and  impulses  of  the  workers. 

What,  then,  is  labor's  opinion  of  itself?  For  one  thing, 
labor  feels  that  it  is  doing  as  well  as  it  should  be  expected 
to  do  under  the  circumstances.  Granting  abuses  here  and 
there,  and  bad  leaders  occasionally,  labor  nevertheless  con- 
siders that  it  is  doing  as  well  as  any  incipient  democracy 
has  done  in  days  gone  by.  But  more  than  this,  labor  feels 
that  heaven  helps  those  who  help  themselves.  Economic 
salvation  lies  in  self-assertion.  Self-help  is  to  be  found 
in  self-determination.  It  is  a  duty  to  be  discontented  with 
conditions  which  are  inimical  to  the  highest  progress. 
Complacency  and  contentment  are  for  the  soft  and  indo- 
lent. It  is  a  crime  to  be  a  slacker  and  refuse  to  face  the 
responsibility  of  winning  a  better  status  for  the  labor  group. 
In  carrying  out  this  militant  attitude  what  does  it  mat- 
ter if  real  pressure  comes  from  among  the  minority  of  the 
labor  group?  Progress  has  always  come  from  the  work 
of  an  active  minority.  A  fearless  and  determined  group 
must  push  forward  toward  a  new  status  for  labor.  Only 
by  such  pressure  can  labor  be  lifted  out  of  its  present 
status  of  material  and  psychological  oppression  to  a  status 
of  responsibility  and  influence.  It  would  be  a  misinter- 
pretation of  the  facts  of  the  case  to  insinuate  that  labor, 
in  reasoning  along  such  lines,  is  wily,  vicious,  or  insincere. 
Labor  is  gripped  with  just  as  much  genuine  earnestness  and 
spontaneity  as  any  other  economic  group.  The  ideology  of 
labor  on  all  such  matters  is  the  natural  and  honest  psycho- 
logical outcome  of  the  conflict  between  cold  economic  facts 
and  instinctive  human  reactions. 

Labor's  ideas  are,  therefore,  a  great  dynamic  force  in  the 
economic  situation.  The  original  instincts  of  human  na- 
ture direct  the  course  of  labor's  mind.  Much  of  the 
mental  framework  of  the  labor  group  appears  oftentimes 
to  be  almost  a  mass  of  blind  instincts  which  have  not  yet 
been  carefully  thought  over.  "That  complex  of  impres- 
sions, thwartings,  and  desires,  warm  and  human,  is  wait- 


Labor:  Its  Part  in  Production  157 

ing  to  be  sharpened  and  shaped  into  orderly  thoughts  and 
then  into  a  program  of  action.  .  .  .  The  great  instinctive 
movement  of  the  workers  is  pusliing  on. ' '  The  unanalyzed  de- 
sires are  none  the  less  of  immeasurable  significance.  General 
Smuts  has  remarked  that  "old  ideals  of  wealth,  of  prop- 
erty, of  class  and  social  relations,  of  international  relations, 
of  moral  and  spiritual  values,  are  rapidly  changing.  The 
old  political  formulas  sound  hollow;  the  old  landmarks  by 
which  we  used  to  steer  are  disappearing  beneath  a  great 
flood. "^  In  the  words  of  R.  F.  Hoxie,  "The  unionists  do 
not  usually  independently  understand  the  theory  of  their 
own  demands,  or  their  constructive  program.  They  feel." 
It  is,  therefore,  a  great  instinctive  mass  movement  which 
must  be  seen  beneath  the  ideas  of  the  labor  mind.  With- 
out a  frank  conception  of  this  peculiar  dynamic  condition 
of  the  labor  mind  no  one  is  in  a  position  to  comprehend  at 
all  accurately  the  economic  causes  of  labor's  attitude  toward 
its  part  in  the  whole  productive  organization. 

Immigration 

The  causes  and  consequences  of  immigration  are  of  such 
a  nature  that  they  have  a  direct  bearing  upon  economic 
principles. 

The  motives  to  immigration  are  very  largely  economic 
motives.  The  efforts  of  shipowners,  of  employers  in  this 
country,  of  agents  seeking  an  opportunity  for  making  a 
profit  upon  immigrants,  of  landowners  looking  for  immi- 
grant buyers,  have  probably  been  responsible  for  fully  one- 
half  of  the  immigration  to  American  shores.  At  the  pres- 
ent time,  organized  labor  is  urging  that  immigration  be 
practically  prohibited,  whereas  simultaneously  a  large 
group  of  organized  employers  are  anxious  that  such  re- 
strictions as  are  placed  upon  immigration  shall  allow  con- 
siderable leeway  for  the  admission  of  alien  labor  for  their 
plants. 

Distinct  types  of  immigrants  have  responded  to  the  condi- 
tions. The  large  majority  of  immigrants  seeking  to  come 
are  from  countries  of  southeastern  Europe.  Approxi- 
1  Gleason,  "What  the  Workers  Want,"  p.  270. 


158  Labor:  Its  Part  in  Production 

mately  three-fourths  of  these  classes  are  unskilled  laborers. 
"There  can  be  no  doubt  that  the  important  cause  of  the 
increase  of  immigration  in  the  last  twenty-five  years  has 
been  the  necessity  for  more  crude  labor  to  work  in  con- 
junction with  our  labor-saving  machinery  and  expanding 
capital  in  the  development  and  utilization  of  our  national 
resources. "  ^  It  is  rare  to  find  a  native-born  American 
employed  at  unskilled  work  in  a  big  industrial  plant  in 
America.^  Aside  from  their  lack  of  skill,  these  immigrants 
are,  in  alarming  numbers,  incompatible  with  Americans  in 
intellectual  equipment,  and  in  standards  of  life.  E.  A. 
Ross  describes  the  type  by  stating:  "The  plain  truth  is 
that  rarely  does  an  immigrant  bring  in  his  intellectual 
baggage  anything  of  use  to  us."^  The  type,  moreover,  is 
one  which  does  not  acquire  a  liking  for  life  in  America. 
Statistical  records  indicate  that  approximately  one-half 
of  all  immigrants  return  to  their  native  lands. 

The  economic  effects  of  this  type  of  immigration  are 
manifold.  One  of  its  most  important  effects  is  seen  in  the 
state  of  the  labor  market  and  the  instability  of  employ- 
ment. The  tendency  has  been  for  the  supply  of  labor  to  be 
so  greatly  enhanced  by  immigration  that  there  has  usually 
been  an  excess  of  laborers  above  the  actual  demand  in 
American  industries.  The  records  indicate  that  from  one 
million  to  six  million  workers  are  idle  in  the  United  States 
all  the  time.  A  flood  of  unskilled  laborers  always  coming 
into  American  industries  has  severely  influenced  the  re- 
lations of  supply  and  demand  in  affecting  the  wage  rates. 
Often  the  fact  that  a  group  of  alien  workers  could  be 
promptly  secured  to  displace  union  members  or  agitators 
or  strikers  has  enabled  employers  to  maintain  a  firm  and 
rigid  discipline  in  their  shops.  Moreover  the  tendency  of 
immigration  to  gather  momentum  during  a  period  of 
American  prosperity,  and  for  this  momentum  to  continue 
well  into  a  period  of  depression,  has  served  to  intensify  the 
unemployment    disorders    during    periods    of    industrial 

1  D.  D.  Lescohier,  "The  Labor  Market,"  p.  8. 

2  W.  R.  Bassett,  "When  the  Workmen  Help  You  Manage,"  p.  11. 

3  E.  A.  Ross,  "The  Old  World  in  the  New,"  pp.  279,  285. 


Labor:  Its  Part  in  Production  159 

crisis.  Again,  the  possibility  of  falling  back  upon  a  reserve 
supply  of  immigrants  has  made  employers  feel  frequently 
that  the  stabilization  of  employment  is  unnecessary.  ' '  With 
the  possibility  of  falling  back  upon  immigrants,  business 
does  not  plan  ahead,  spread  out,  and  dovetail  its  work  so  as 
to  utilize  to  best  advantage  the  workers  already  here. ' '  ^ 
The  urgency  for  stabilization  of  employment  is  great.  At 
present  the  tendency  is  for  employment  bureaus  managed 
by  aliens  to  serve  as  the  medium  between  the  man  out  of 
work  and  the  job  looking  for  a  worker.  "So  far  as  the  im- 
migrant is  concerned,  the  private  employment  agency  of  his 
own  racial  group  is  still  the  chief  means  by  which  he  secures 
work.  "2  A  system  of  American  employment  agencies, 
either  public  or  private,  or  both,  appears  to  be  indispensable 
if  the  labor  market  is  ever  to  be  organized  to  the  advan- 
tage of  both  the  employer  and  the  immigrant.  The  inade- 
quate and  unscientific  distribution  of  immigrant  labor  re- 
sults in  harmful  congestion  of  immigrants  in  city  districts 
and  in  certain  industries.  It  also  leaves  room  for  much 
exploitation  of  the  immigrants  by  unscrupulous  racial  em- 
plojrment  bureaus  and  necessitates  much  distress  and  dis- 
couragement among  the  immigrants  during  the  periods  of 
unemployment.  The  situation  also  has  the  effect  of  disap- 
pointing the  alien  in  his  anticipations  of  American  life, 
and  is  an  un- Americanizing  influence. 

All  in  all,  the  American  workers  have  suffered  greatly 
from  the  competition  of  crude  immigrant  labor.  The 
forms  of  this  suffering  are  briefly  stated  by  J.  W.  Jenks 
and  J.  H.  Hammond  as  follows,  "The  principal  evils  which 
have  resulted  from  the  great  influx  into  the  United  States 
from  southern  and  western  Europe  have  been : 

1.  To  keep  down  the  wages  of  native  Americans  and 
of  the  northern  and  western  European  immigrants. 

2.  To  retard  improvement  in  the  general  working  condi- 
tions of  labor,  especially  in  mining  and  manufactures. 

3.  To  flood  the  country  with  laborers,  illiterate  in  En- 
glish, and,  therefore,  difficult  to  develop  in  efficiency,  to 

1  J.  R.  Commons,  "Races  and  Immifrrants  in  America,"  p.  xv^i, 

2  F.  Keller,  "Immigration  and  the  Future,"  p.  164. 


160  Labor:  Its  Part  in  Production 

elevate  to  the  American  standard  of  living,  and  to  assimi- 
late into  our  social  and  political  system."^ 

These  effects  are  brought  about  in  part  by  the  excessive 
numbers  of  immigrants,  but  more  fundamentally  by  their 
low  standards  of  living  and  their  willingness  to  work  cheap. 
As  observed  by  H.  P.  Fairchild,  "It  is  not  because  he  has 
had  to  compete  with  more  laborers,  so  much  as  with  cheaper 
laborers,  that  the  American  workman  has  failed  to  secure 
a  higher  remuneration  for  his  services."^ 

The  economic  effects  of  immigration  are  particularly  con- 
spicuous in  certain  industries  which  "are  almost  wholly  de- 
pendent upon  immigrant  labor,  as  it  is  impossible  to  secure 
for  them  a  native  supply  at  any  price."  ^  Such  industries 
for  instance  are  iron  and  coal,  lumbering,  track  and  road 
building,  construction,  housing,  leather  manufacturing, 
meat  packing,  and  clothing  manufacturing. 

A  further  consequence  of  immigration  is  seen  in  the  un- 
der-development  of  agriculture  and  the  comparative  over- 
development of  manufacturing.  "The  food  products  of  the 
country  do  not  keep  up  with  population,  but  the  manufac- 
tures exceed  the  growth  of  population.  Recent  immigrants 
from  South  and  East  Europe  go  mainly  into  manufac- 
tures. America  is  becoming  a  food  importing  and  a  manu- 
facture exporting  country.  .  .  .  Farmers  cannot  get  labor- 
ers on  account  of  the  competition  of  manufacturers."* 

The  immigrant  of  the  pre-war  days  was  criticised  for  be- 
ing too  docile;  labor  leaders  berated  him  for  refusing  to  join 
unions  or  to  fight  for  better  industrial  conditions;  econo- 
mists and  publicists  condemned  him  for  accepting  wages  too 
low  for  Americans  and  for  acquiescing  in  an  inferior  and 
degrading  standard  of  living.  But  the  post-war  immigrant 
is  criticised  for  not  being  docile  enough.  If  he  comes  from 
northern  or  western  Europe,  he  is  likely  to  be  impregnated 
with  trade  union  or  syndicalist  ideas;  if  he  comes  from 
southern  or  eastern  Europe,  he  is  likely  to  be  permeated 
"with  socialistic  or  communistic  doctrines.     The  new  immi- 

1  "Great  American  Issues,"  p.  132. 

2  "Immigration,"  p.   303. 

s  F.  Kellor,  "Immigration  and  the  Future,"  p.   157. 

4  Commons,  "Kaces  and  Immigrants  in  America,"  p.  xxvii. 


Labor:  Its  Part  in  Production-  161 

grant,  with  his  new  psychological  background,  is  more 
amenable  to  unionization,  more  alert  to  demand  better  living 
standards,  quicker  to  resist  the  industrial  status  quo. 

Three  major  types  of  economic  policy  toward  aliens 
have  developed :  Americanization,  unionization  and  re- 
striction. During  and  immediately  following  the  war  the 
immigrant,  particularly  the  group  from  enemy  countries, 
was  looked  upon  with  suspicion  and  intolerance.  The  im- 
migrant was  considered  a  dormant  Bolshevist;  and  raids, 
arrests,  deportations,  and  persecutions  were  not  at  all  un- 
common. The  result  was  a  forceful  suppression  of  the 
more  conspicuous  trouble  makers;  but  at  the  same  time 
there  was  aroused  considerable  resentment  and  disappoint- 
ment in  the  minds  of  a  great  number  of  ordinary  immi- 
grants. 

The  fundamentals  of  Americanization  lie  in  the  basic 
working  conditions  of  the  immigrants  in  America.  If  wages 
are  sound,  if  the  hours  of  work  are  right,  if  the  discipline 
by  the  boss  and  the  foreman  is  fair  and  human,  if  the 
working  surroundings  are  wholesome, — then  and  then 
only  is  genuine  Americanization  a  practicability.  As  J. 
R.  Commons  has  emphasized, — "More  than  any  other  class 
in  the  community,  it  is  the  employers  who  determine  the 
progress  of  the  foreigner  and  his  children  toward  Ameri- 
canization. They  control  his  waking  hours,  his  conditions 
of  living,  and  his  chances  of  advancement." 

With  these  fundamentals  go  certain  supplementary 
Americanizing  policies.  Many  plants  have  installed  En- 
glish language  classes,  night  schools  for  study  of  social  and 
historical  subjects,  Americanization  committees,  classes  for 
vocational  training,  etc.  Many  have  required  workmen  to 
have  at  least  their  first  papers  toward  naturalization. 
Others,  when  the  post-war  period  of  depression  came, 
adopted  the  policy  of  "Fire  the  alien  first."  In  some 
plants,  the  reduction  of  illiteracy  was  attempted.  "Work- 
ers who  cannot  understand  English  are  under  a  severe 
economic  handicap  from  the  employer's  standpoint.  Their 
efficiency  is  limited  because  they  confuse  instructions  and 
muddle  orders.    Approximately  one-fifth  of  the  total  for- 


162  Labor:  Its  Part  in  Production 

eign-born  population  in  America  cannot  read  or  speak  En- 
glish. It  was  reported  that  approximately  one-fourth  of 
all  men  in  draft  ages  were  unable  in  war  service  to  inter- 
pret orders  intelligently.  Language  education  obviously 
is  reflected  in  economic  efficiency. 

The  immigrant  is  a  remarkable  saver.  He  practices 
thrift  much  more  rigidly  than  the  native  American.  But 
at  present,  his  savings  go  back  to  his  home  country,  or  are 
deposited  with  a  racial  bank  which  caters  to  his  particular 
needs,  or  go  to  the  brokers  in  foreign  securities.  Ameri- 
can banks  are  indifferent  to  these  savings  because  they 
come  in  too  small  amounts.  It  scarcely  pays  to  bother  with 
minute  deposits.  Hence  the  property  stake  of  the  immi- 
grant is  in  fields  which  unite  his  interests  with  foreign 
financial  facilities.  "Nothing  less  than  a  system  for  reach- 
ing and  safeguarding  these  savings  for  investments  will 
bring  about  assimilation  through  the  pocketbook,  and 
American  banks  should  be  prepared  to  undertake  the 
project.  "1  Also,  the  immigrant  from  time  to  time  needs 
credit  to  buy  a  home,  to  set  himself  up  in  business,  to  tide 
himself  over  a  period  of  unemplojnnent.  At  present  he 
turns  to  a  local  racial  leader,  an  immigrant  bank,  his  con- 
sul, a  loan  shark  or  a  pawnshop.  All  such  roads  lead 
away  from  a  primary  property  stake  in  America.  Insur- 
ance of  immigrants  indicates  a  similar  situation.  Besides, 
American  stores  have  not  found  it  attractive  to  cater  to 
immigrant  buyers,  the  consequence  being  apparent  in  the 
custom  of  buying  at  racial  stores.  The  alien  can  scarcely 
get  the  spirit  of  an  American  standard  of  living  when  the 
market  in  which  he  buys  his  food  and  clothes  resembles  so 
greatly  the  shops  and  stores  of  the  old  country.  Economic 
Americanization  in  all  these  respects  is  necessary  if  the 
country  is  to  direct  and  control  the  primary  interests  of  the 
immigrant  workers. 

Americanization  policies  are  deeply  influenced  by  the  re- 
lations of  labor  unions  with  immigrants,  "Labor  unions 
which  numbered  scarcely  1,000,000  members  in  1900,  in- 
creased to  nearly  5,000,000  in  1920.  A  large  part  of  the 
1  F.  Kellor,  "Immigration  and  the  Future,"  p.  155. 


Labor:  Its  Part  in  Production  163 

increase  came  from  recent  immigrants.  .  .  .  The  major- 
ity of  unionists  are  immigrants  and  children  of  immigrants 
from  countries  that  know  little  of  unionism.  .  .  .  When 
once  moved  by  the  spirit  of  unionism,  the  immigrants  from 
low  standard  countries  are  the  most  dangerous  and  de- 
termined of  unionists.  .  .  .  Their  resentment  toward  em- 
ployers who  have  kept  them  apart,  their  devotion  to  their 
newfound  brothers,  are  terrible  and  pathetic.  With  their 
emotional  temperament,  unionism  becomes  not  merely  a 
fight  for  wages  but  a  religious  crusade.  It  is  in  the  nature 
of  retribution  that,  after  bringing  to  this  country  all  the 
industrial  races  of  Europe  and  Asia  in  the  effort  to  break 
down  labor  organizations,  these  races  should  so  soon  have 
wiped  out  race  antagonism  and,  joining  together  in  the 
most  powerful  of  labor  unions,  have  wrenched  from  their 
employers  the  greatest  advances  in  wages.  "^  The  immi- 
grant unionists  tend  more  strongly,  as  a  general  matter, 
toward  radical  unionism  than  native  American  unionists. 
Thus,  the  coal  miners,  the  garment  workers,  the  longshore- 
men are  the  basis  of  three  strong  labor  unions  composed 
preponderantly  of  immigrants,  and  their  economic  demands 
are  in  a  larger  measure  socialistic  than  are  those  of  most 
unions  where  native  American  membership  prevails. 

The  union  exercises  a  powerful  influence  over  the  immi- 
grant's conception  of  America.  To  quote  again  from  Com- 
mons, "The  effort  of  organized  labor  to  organize  the  unskilled 
and  the  immigrant  is  the  largest  and  most  significant  fact 
of  the  labor  movement.  .  .  .  For  it  is  not  too  much  to  say 
that  the  only  effective  Americanizing  force  for  the  south- 
eastern European  is  the  labor  union."  Employee  repre- 
sentation with  or  without  the  union  has,  however,  in  some 
cases  accomplished  much  the  same  purpose,  but  only  in 
those  industries  where  the  employers  have  an  exceptionally 
enlightened  conception  of  the  Americanizing  influence 
which  group  self-expression  by  the  immigrants  exerts. 
To  make  this  self-expression  as  safe  and  sane  as  possible 
and  to  provide  a  wholesome  and  American  form  of  ex- 

1  J.  R.  Commons,  "Races  and  Immigrants  in  America,"  pp.  xx, 
153-154. 


164  Labor:  Its  Part  in  Production 

pression  of  the  human  impulses  behind  it  is  a  sound  psy- 
chological attitude.  The  attempt  in  not  a  few  quarters  to 
stamp  out  the  impulses  and  forbid  self-expression  is  a  di- 
rect and  virtually  irresistible  cause  of  those  mental  con- 
flicts and  psychological  upheavals  which  underlie  indus- 
trial disorders.  Expression,  discipline  and  sublimation  of 
these  strong  instincts  of  the  immigrants  is  the  sound  psy- 
chological and  economic  procedure;  suppression  and  psy- 
chic revolt  are  fraught  with  disorder  and  disaster. 

Society  as  a  whole  accepts  the  social  and  economic  re- 
sponsibility of  protecting  itself  from  excessive  invasions  by 
undesirable  aliens.  Laws  forbidding  the  admission  of 
anarchists,  diseased,  insane,  etc.,  have  been  an  established 
part  of  American  policy.  The  literacy  test  was  adopted 
in  1917,  and  serves  as  a  roughly  approximate  quality  test. 
In  1921,  a  quantity  test,  limiting  the  annual  immigration 
by  any  one  race  to  three  per  cent,  of  those  in  the  United 
States  by  the  census  of  1910,  became  the  law  of  the  land. 
The  pressure  steadily  increases  to  evolve  more  accurate 
quality  tests  for  immigrants.  The  development  of  tests  for 
measuring  the  levels  of  intelligence  in  the  Army  during  the 
World  War,  and  the  development  of  similar  tests  for  in- 
dustrial needs,  and  for  schools  and  colleges,  holds  out  the 
tangible  prospect  of  tests  of  a  like  nature  for  immigrants. 
Such  tests  would  eliminate  those  of  inferior,  abnormal, 
delinquent,  or  neurotic  mental  equipment,  and  thereby  sup- 
ply the  Americanization  agencies  with  a  higher  grade  of 
human  material  for  their  efforts. 

Population 

The  classic  principles  of  Malthus  relative  to  population 
deserve  to  be  the  starting  point  in  considering  the  popula- 
tion problem.  Malthus  held  that  there  is  a  "constant 
tendency  in  all  animated  life  to  increase  beyond  the  nour- 
ishment prepared  for  it.  .  .  .  The  ultimate  check  to  popu- 
lation appears  then  to  be  a  want  of  food  arising  necessarily 
from  the  different  ratios  according  to  which  population 
and  food  increase."  He  claimed  that  if  the  standard  of 
living  were  raised,  thereupon  population  would  be  encour- 


Labor:  Its  Part  in  Production  165 

aged  to  increase  so  mueli  the  faster,  until  tlie  increased 
means  of  subsistence  would  be  exhausted,  and  men  would 
be  back  again  at  the  minimum  levels  of  existence.  He 
conceived  of  two  great  checks  upon  population,  positive 
and  negative.  Positive  checks  were  in  the  form  of  starva- 
tion, pestilence,  war,  disease ;  negative  checks  in  the  form  of 
wilful  limitation  of  the  birth  rate.  He  entertained  but 
small  hopes  of  tlie  negative  checks  ever  becoming  influen- 
tial enough  to  pull  men  up  to  higher  standards  of  life. 

In  spite  of  the  Malthusian  pessimism,  the  standard  of  liv- 
ing has  been  raised.  While  even  tlie  poorest  laborers  are 
better  off  than  the  lowest  ranks  were  a  century  ago,  tlie 
better  classes  of  labor,  in  comparison  with  their  great 
grandfathers,  are  immersed  in  luxury.  The  theory  did  not 
give  full  justice  to  two  factors  which  have  subsequently 
played  a  large  part  in  the  population  increase ;  one,  the  in- 
creased productivity  of  the  modem  economic  system;  the 
other,  the  decreased  birth  rate  following  upon  an  improved 
living  standard.  The  industrial  revolution,  the  machine 
method  of  production,  the  factory  system,  the  increase  of 
capital  all  served  to  increase  the  productive  efficiency  of 
the  population  so  materially  as  to  more  than  offset  the  in- 
crease in  human  numbers.  In  regard  to  the  second  factor, 
history  has  found  that  the  higher  the  standard  of  living, 
the  lower  the  birth  rate  and  the  lower  the  death  rate;  the 
lower  the  standard  of  living,  the  higher  the  birth  and  death 
rates. 

The  former  factor  has  established  what  S.  N.  Patten  calls 
"the  new  basis  of  civilization."  He  asserts  ''the  potent 
basic  fact  of  a  civilization  Avhose  bounds  are  indefinitely 
widened  because  the  unskilled  laborer  need  no  longer  be  held 
to  the  plane  of  sheer  animal  terror  by  uncertainty  of  food 
and  employment.  Artificial  culture  and  experimental  sci- 
ence have  already  fundamentally  altered  the  elemental  rela- 
tions existing  two  hundred  years  ago  between  population 
and  environment.  .  .  .  Our  social  inheritances  come  from 
two  radically  different  forces  that  have  been  acting  upon 
us  from  the  first.  One  springs  from  universal  deficit — the 
poverty  of  the  early  world;  the  other  emerges  from  the 


166  Labor:  Its  Part  in  Production 

later  store  of  goods  which  build  the  social  surplus.  .  .  . 
Abolish  poverty,  transform  deficit  into  surplus,  fill  depletion 
with  energy,  and  the  ascribed  heredity  of  the  poor  will 
vanish  with  its  causes.  .  .  .  Disease,  oppression,  irregular 
work,  premature  old  age,  and  race  hatreds  characterized 
the  vanishing  age  of  deficit ;  plenty  of  food,  shelter,  capi- 
tal, and  mobility  of  men  and  goods  define  the  age  of  sur- 
plus in  which  we  act.  Where  food  and  capital  are,  there  is 
work,  and  where  there  is  steady  work,  progress  comes  even 
while  wages  remain  low.  The  quantities  of  food  and  of 
capital  will  increase  more  rapidly  than  they  have  done, 
while    the    birth    rate    touches    a    lower    figure    in    every 


census. 


1 


With  this  material  advance  has  come  a  psychological 
development  especially  noticeable  in  the  most  favored 
classes  of  society.  The  family  instincts  may  be  said  to  be 
the  positive  forces  tending  toward  an  increasing  birth  rate. 
But  as  advances  in  income  are  made,  people  see  the  oppor- 
tunity of  satisfying  a  wide  variety  of  wants,  ambitious, 
and  desircvS.  The  family  instincts  tend  to  bring  parental 
responsibilities  and  obligations;  the  other  instincts  can  be 
expressed  with  a  minimum  of  responsibility  and  obligation, 
— they  lead  to  simpler,  easier  life  enjoyments.  Moreover, 
the  increase  in  education,  social  communication,  and  intel- 
ligence brings  about  a  wider  and  wider  dissemination  of  the 
means  of  wilful  prevention  of  birth  increase.  Also,  there 
is  an  instinctive  social  revulsion  which  leads  those  in  pos- 
session of  the  knowledge  of  preventive  cheeks  to  prohibit 
by  law  and  social  taboo  any  formal  spreading  of  the  knowl- 
edge among  the  rank  and  file.  The  knowledge  of  preven- 
tive checks  comes,  therefore,  largely  for  instinctive  reasons, 
to  be  a  kind  of  monopoly  in  the  hands  of  the  more  well- 
to-do  classes.  As  a  consequence,  among  these  classes  the 
birth  rate  is  controlled  without  any  material  repression  of 
the  sex  instincts.  Economic  advantage  and  this  psycho- 
logical development  have  gone  hand  in  hand. 

The  families  of  higher  education  and  income  are  already 
guilty  of  race  suicide.  If  the  replenishment  of  population 
1  Patten,  "The  New  Basis  of  Civilization,"  pp.  25,  34,  43,  186. 


// 


Labor:  Its  Part  in  Production  167 

•were  dependent  upon  them,  it  would  not  be  accomplished. 
In  the  more  highly  cultured  New  England  districts,  the 
size  of  families  is  so  limited  that  the  population  either  has 
ceased  to  increase  or  is  actually  on  the  decline.  At  the 
other  extreme,  the  inferior  native  or  foreign  stock  mul- 
tiplies rapidly.  Writing  of  Great  Britain,  William  Mc- 
Dougall  states,  "In  our  own  country  one-quarter  of  the 
people  of  each  generation  become  the  parents  of  about 
one-half  of  the  population  of  the  succeeding  generation. 
There  can  be  no  doubt  that,  among  this  quarter  of  the 
population  the  parental,  and  probably  also  the  reproduc- 
tive, instinct,  is  on  the  average  stronger  than  in  the  re- 
maining three-quarters  who  produce  the  other  half  of  the 
next  generation."^  In  other  words  "the  present  state  of 
the  law,  of  public  opinion,  and  of  our  economic  system  is 
tending  to  degrade  the  quality  of  the  race  by  making  the 
worst  half  of  the  population  the  parents  of  more  than  half 
of  the  next  generation. ' '  ^ 

In  analyzing  the  situation,  H.  G.  Wells  draws  a  picture 
which  is  comprehensive:  "Travel,  leisure,  freedom,  com- 
fort, property  and  increased  ability  for  business  competi- 
tion are  the  rewards  of  abstinence  from  parentage,  and 
even  the  disapproval  of  President  Roosevelt  and  the  pride 
of  offspring  are  insufficient  counterweights  to  these  in- 
ducements. Large  families  disappear  from  the  States, 
and  more  and  more  and  more,  couples  are  childless.  Those 
who  have  children  restrict  their  number  in  order  to  afford 
those  they  have  some  reasonable  advantage  in  life.  "^  In 
order  to  remedy  the  faulty  inheritance  of  the  population 
from  these  causes,  the  science  of  eugenics  has  come  into 
play.  Given  its  initial  impetus  by  Sir  Francis  Galton 
about  a  generation  ago,  it  has  come  to  exercise  a  deep  in- 
fluence upon  social  and  economic  thinking.  The  chief 
objective  of  the  science  is  to  improve  the  quality  of  the 
race  by  discouraging  the  birth  rate  among  the  unfit  groups 
and  encouraging  it  among  the  more  developed  classes. 

1  "Introduction  to  Social  Psvcholofn',"  p.  270. 

sBertrand  Eussell.  "Wliy  ]\!en  Fipl'it,"  p.  213. 

3  "Social  Forces  in  England  and  America,"  p.  374. 


168  Labor:  Its  Part  in  Production 

The  goal  of  a  study  of  population  problems  from  the 
economic  standpoint  may  be  stated  in  the  form  of  two 
standards, — the  quality  standard  and  quantity  standard. 
The  quantity  standard  refers  to  the  "best  proportion  be- 
tween the  numbers  of  inhabitants  and  the  area  and  resources 
of  a  land,  judged  with  reference  to  the  abiding  welfare  of 
the  great  mass  of  the  people  of  the  nation. "  ^  If  the  quan- 
tity standard  be  judged  from  a  pecuniary  viewpoint  it  is 
proper  to  state  that,  "It  should,  therefore,  be  the  aim  of 
every  nation  to  keep  its  population  at  that  number  which  is 
bound  to  result  in  the  greatest  amount  of  real  income  to 
the  average  citizen."^  It  would  appear  that  for  the  United 
States  the  quantity  limit  has  been  approximately  reached 
unless  there  develops  an  increase  in  the  per  capita  produc- 
tivity of  economic  goods.  For  fifteen  years  before  the  war 
the  real  income  of  the  wage-earning  classes  had  certainly 
not  increased  and  probably  had  slightly  decreased.  The 
increase  in  real  income  achieved  during  the  war  was  made 
possible  by  an  increase  in  national  production  of  approxi- 
mately 15  per  cent.  However,  the  depression  following  the 
war  has  seen  production  suffer  a  deep  slump,  throwing  up- 
wards of  five  millions  of  workers  out  of  jobs  and  income, 
and  tending  to  put  the  real  incomes  of  large  groups  of  un- 
skilled labor  on  approximately  the  pre-war  levels. 

The  quality  standard  looks  to  the  type  of  character  and 
the  hereditary  vigor  of  the  population  which  exists,  and  in- 
sists that  a  controlling  principle  of  population  shall  be  the 
attainment  of  a  superior  racial  stock.  "The  wise  ambi- 
tion for  a  people  is  to  maintain  its  life  at  a  higher  physical 
and  psychic  level  rather  than  to  increase  the  number  of  its 
members  at  the  expense  of  degrading  its  life  below  an  ac- 
cepted standard.  The  fact  that  a  people  increases  but 
slowly  in  numbers  may  be  an  evidence  not  of  degeneracy 
but  of  enlightenment  and  prudence."^  John  Stuart  Mill 
referred  to  the  phrase  "the  stationary  standard"  as  a  possi- 
ble ideal.    That  is  to  say,  it  may  be  desirable  for  a  nation 

1  F.  A.  Fetter,  American  Economic  Review,  Vol.  Ill,  Sup.,  p.  6. 

2  W.  I.  King,  "Wealth  and  Income  of  the  People  of  the  United 
States,"  p.  240. 

3  E.  C.  Hayes,  "Introduction  to  Sociology,"  p.  44. 


Labor:  Its  Part  in  Production  169 

to  limit  its  population  so  that  the  numbers  neither  increase 
nor  decrease,  because  a  persistent  increase  under  conditions 
of  limited  economic  support  would  inevitably  lead  to  a  de- 
terioration in  the  quality  of  the  population. 

The  1920  census  for  the  United  States  registers  a  popula- 
tion of  approximately  one  hundred  and  five  million.  The  in- 
crease during  the  last  decade  was  at  the  rate  of  14.9  per 
cent.,  or  a  rate  of  increase  only  two-thirds  that  of  the  previ- 
ous decade  and  less  than  one-half  that  of  the  last  decade  be- 
fore the  Civil  War.  Part  of  this  lowered  rate  of  increase  of 
the  last  few  years  is  due  to  the  falling  off  of  immigration  dur- 
ing the  war,  and  to  war  mortality.  However,  looked  at 
over  a  broad  space  of  time,  it  indicates  something  of  much 
greater  significance,  namely,  a  tendency  of  the  rate  of  in- 
crease steadily  to  diminish  during  the  last  century.  If  this 
tendency  is  not  checked  it  will  be  only  a  comparatively 
short  time  before  the  population  will  have  become  station- 
ary or  have  begun  to  decline.  In  other  words,  America  is 
moving  toward  a  position  which  France  has  already 
reached  and  which  England  has  approximated. 

Of  the  American  population,  51.9  per  cent,  are  living 
in  cities  or  towns  of  more  than  2500  inhabitants.  The 
American  people  steadily  congest  more  and  more  in  urban 
communities  partly  because  of  the  herd  instincts  which 
bring  genuine  pleasure  from  close  contact  with  one's  fel- 
lows and  partly  because  of  the  economic  necessities  of  the 
factory  regime.  This  increasing  urban  life  has  well  known 
influences  in  the  quality  and  character  of  large  groups 
of  the  population. 

Any  conception  of  preventive  checks  upon  the  popula- 
tion to  keep  it  within  the  quality  and  quantity  standards 
must  take  into  account  the  fundamental  relation  of  the  family 
to  the  birth  rate.  In  France  it  is  a  matter  of  family  pru- 
dence to  limit  the  family  to  a  size  making  possible  full  edu- 
cational and  financial  advantages  to  a  few  children.  In 
England,  and  to  an  increasing  extent  in  America,  family 
prudence  is  working  in  the  same  direction.  To  quote  H. 
Bosanquet,  "Finally  we  come  to  the  most  important  econo- 
mic function  of  the  family,  perhaps  the  most  important 


170  Labor:  Its  Part  in  Production 

purely  economic  function  which  exists  at  all,  since  it  con- 
trols directly  and  finally  the  prosperity  and  the  ruin  of 
nations.  In  the  family,  and  the  family  alone,  are  com- 
bined the  forces  which  determine  the  quantity  of  popula- 
tion with  the  forces  which  determine  its  quality ;  and  with- 
out this  combination  the  decay  of  the  people  is  inevitable. 
.  .  .  Where  the  quality  is  right  no  necessary  limit  is  at 
present  within  view ;  where  the  quality  is  wrong,  each  one  is 
too  many."^ 

Any  factor  which  tends  to  undermine  the  economic 
standards  of  the  family  immediately  menaces  the  quality 
of  the  population.  Where  an  unnecessary  accident  rate 
throws  the  burden  of  earning  the  family  income  upon 
the  mother  or  the  children,  or  where  unemployment  re- 
quires a  partial  reliance  upon  the  aid  of  charity,  or  where 
low  wages  or  excessive  hours  or  any  other  economic  force 
lowers  the  vitality  of  any  members  of  the  family,  the 
quality  of  the  population  suffers.  In  their  more  extreme 
forms,  each  of  these  factors  leads  to  positive  degeneracy 
and  racial  deterioration.  The  family  has  in  the  past  been 
left  to  cope  with  these  problems  upon  a  laissez-faire  basis. 
A  large  number  of  children  have  been  commonly  looked 
upon  as  a  drastic  financial  hardship  for  the  family,  yet  the 
community  has  recognized  no  responsibility  for  coming 
to  the  financial  rescue  of  overburdened  families.  The 
new  tendency,  although  as  yet  but  mildly  developed,  is  in 
the  direction  of  making  the  cost  of  children  a  partial 
charge  upon  the  community.  The  payment  of  maternity 
benefits,  the  provision  of  health  compensation  and  other 
forms  of  insurance  under  social  control,  the  insistence  upon 
rest  periods  and  vacations  for  women,  the  allowance  of 
income  tax  exemptions  in  proportion  to  the  number  of 
children,  the  segregation  of  hereditary  defectives  at  state 
expense,  are  a  few  of  the  manifestations  of  this  tendency. 

Moreover  the  economic  status  of  families  and  children  is 

affected   by   religious   convictions.      Catholic    families   are 

inclined   to   be  larger  than   non- Catholic   because   of   the 

religious  tenets  against  restricting  the  birth  rate.    McDou- 

i"The  Family,"  p.  232. 


Labor:  Its  Part  in  Production  171 

gall  concludes,  "That  where  religious  and  other  sanctions 
give  adequate  support  to  the  family  instincts,  no  serious 
diminution  of  fertility  occurs."  Roosevelt  made  urgent 
appeals  against  race  suicide  by  insisting  that  it  must  come 
to  be  a  proud  family  duty  among  the  well-to-do  classes 
to  possess  a  generous  number  of  children.  What  Roose- 
velt tried  to  make  a  matter  of  civic  pride,  Galton  declared 
could  be  given  the  force  of  a  religious  idea.  Then  a 
family  would  suffer  a  loss  of  prestige  in  the  community 
unless  it  was  doing  its  share  of  the  replenishment  of  the 
race.  It  would  meet  with  social  condemnation  to  be  respon- 
sible as  a  family  for  any  tendency  towards  race  suicide. 
Obviously,  therefore,  the  per  capita  income  of  the  country 
and  the  quality  and  quantity  of  the  population  all  head 
up  in  the  family  ideals  which  are  generall}^  accepted. 

Economic  Significance  of  the  National  Character 

All  of  the  previous  considerations  in  regard  to  alien  stock 
on  American  soil  and  the  quality  and  quantity  of  the  national 
population  have  the  profoundest  bearing  upon  the  econo- 
mic and  social  progress,  or  decline,  of  the  national  life.  If 
the  preponderance  of  the  population  increase  comes  from 
the  classes  with  the  weakest  biological  inheritance  and  with 
the  least  favorable  family  and  social  environment,  the 
national  character  is  menaced  at  its  vital  centers.  In  the 
competitive  race  between  nations  for  social  and  economic 
survival,  and  in  the  incessant  rivalry  of  nations  for  posi- 
tions of  influence  and  prestige,  no  one  can  doubt  that  the 
ultimate  superiority  is  held  only  by  nations  whose  blood  is 
the  most  virile.  Where  classes  of  population  which  rise 
to  positions  of  economic  success  shrink  from  the  obliga- 
tions of  parenthood,  the  inheritance  of  a  nation  is  jeopar- 
dized, and  America  is  in  the  initial  stages  of  that  pre- 
carious position  at  the  present  day.  Certainly  the  situation 
is  one  which  offers  a  challenge  to  Americans  to  make 
new  adaptations  between  their  family  and  social  standards 
and  their  economic  circumstances ;  and  to  reconstruct  their 
ideals  and  traditions  for  the  avowed  purpose  of  preserving 
the  highest  quality  of  the  national  character. 


172  Labor:  Its  Part  in  Production 


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174  Labor:  Its  Part  in  Production 

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CHAPTER  VII 

CAPITAL:   THE  RIGHTS  AND  DUTIES  OF  OWNERSHIP 

The  distinguishing  features  of  economic  wealth  are  own- 
ership and  utility.  Goods  or  services  become  economic 
wealth  when  they  are  of  use  to  someone  and  when  some- 
one claims  the  rights  of  ownership  over  them.  The  user 
or  the  owner  may  be  an  individual,  a  social  group,  or  a 
political  body.  The  title  of  ownership  consists  of  the  power 
and  right  of  any  agent,  private  or  public,  to  withhold 
goods  or  services  from  use  by  others.  It  is  the  power  to 
withhold  land  from  the  person  who  wants  to  build  a  house 
or  factory.  It  is  the  power  to  withhold  food  or  clothing 
from  the  prospective  consumer.  It  is  the  power  to  with- 
hold water  from  the  city  dweller  or  to  withhold  the  means 
of  transportation  from  the  man  who  wants  to  travel.  Such 
goods  or  services  are  withheld  upon  a  condition, — that  con- 
dition being  the  ability  and  the  willingness  of  the  person 
who  desires  the  goods  or  services  to  give  a  certain  payment. 
Air,  sunlight,  dirt,  the  ocean,  or  rainfall  do  not  reckon 
in  the  category  of  economic  wealth  because  no  one  has  the 
power  to  withhold  such  objects  from  the  use  of  anybody 
else. 

They  do  not  come  into  the  classification  of  wealth  be- 
cause, no  matter  how  useful  they  may  be,  nobody  can 
hold  ownership  over  them.  Nobody  can  keep  them  from 
common  use  on  condition  that  the  would-be  user  offers  cer- 
tain terms  of  payment.  Only  goods  which  are  limited  in 
quantity,  are  capable  of  being  owned.  An  element  of 
scarcity  in  any  good  makes  that  good  of  the  type  which 
can  be   owned   advantageously.     Economic   wealth   arises 

175 


176  Capital 

whenever  any  one  acquires  the  power  to  withhold  goods 
or  services  from  the  use  of  those  who  need  or  want  them.  ^ 

The  distribution  of  this  power  to  withhold  is  the  distri- 
bution of  ownership.  A  large  part  of  economics  is  con- 
cerned with  problems  centering  around  the  means  by  which 
this  power  to  withhold  is  acquired,  the  reasons  why  some 
have  much  of  it  and  others  have  little,  the  methods  by 
which  the  power  to  withhold  is  exercised,  and  the  possi- 
bility of  its  control  by  social  agencies.  These  problems 
are  fundamental  in  economic  studies,  and  a  discussion  of 
their  various  phases  is  of  the  utmost  importance. 

What  are  the  forms  of  the  goods  and  services  of  the 
economic  community?  The  question  makes  necessary  some 
classification  of  goods  and  services.  There  is,  for  example, 
land,  the  income  from  land  being  known  as  rent.  There 
are  also,  material  goods,  such  as  machinery  and  buildings 
used  for  production,  the  income  from  them  being  known 
as  interest  or  profits.  There  are,  thirdly,  material  goods 
such  as  bread  and  butter  or  shoes  and  stockings  to  be  used 
for  consumption,  the  income  from  them  giving  rise  to  profits. 
There  are  finally  labor,  services,  work,  the  income  from 
them  being  known  as  wages,  salaries  or  fees. 

In  their  entirety,  these  goods  and  services  constitute  a 
stock  on  hand,  a  collection  and  accumulation,  and  the  term 
wealth  is  often  used  by  economists  as  covering  this  total 
stock  in  existence  at  any  one  time.  There  is,  however,  a 
second  use  of  the  term,  in  which  reference  is  had  to  the 
income  accruing  to  men  over  a  stated  period  of  time.  What 
is  an  individual's  wealth?  From  the  former  point  of 
view,  it  is  all  the  goods  and  services  which  remain  in  his 
possession  as  a  result  of  his  total  accumulations  to  date. 
From  the  latter  point  of  view  it  is  his  income,  from  what- 
ever source,  for  a  day,  a  month,  or  a  year. 

Under  the  modern  economic  regime,  wealth,  in  which- 
ever light  it  may  be  viewed,  is  measured  by  a  price.    Which 

1  See  Alfred  Marshall,  "Principles  of  Economics,"  pp.  54-G2;  E. 
Cannan,  "Wealth,"  pp.  1-39;  W.  I.  King,  "Wealth  and  Income  of 
People  of  United  States,"  pp.  5-15;  Carver,  "Distribution  of  Wealth," 
Chapter  III. 


Capital  177 

is  the  greater  object  of  wealth,  a  suit  of  clothes  or  an  auto- 
mobile? The  price  attached  to  each  one  is  a  sign  of  its 
relative  wealth.  So  all  goods  and  services  come  to  be 
spoken  of  in  terms  of  money.  Land,  labor,  machinery, 
food,  all  are  tagged  with  a  price.  The  price  system  is  ail 
inclusive  in  the  economic  system,  and  nothing  that  counts 
as  wealth  escapes  the  tag  of  price.  A  good  or  service  with- 
out a  price  sign  is  unintelligible  to  the  economic  system. 
The  total  possessions  of  an  individual,  or  his  income,  or 
his  services  are  translated  into  a  price  and  are  qualified 
to  figure  in  the  economic  regime  only  when  they  have  re- 
ceived that  brand.^  AVhat  is  a  man  worth?  One  hundred 
thousand  dollars,  perhaps.  That  is,  the  goods  and  services 
which  he  has  title  to  are  rated  in  the  price  regime  at  that 
figure.  The  extent  and  degree  of  a  man's  power  to  with- 
hold anything  from  the  use  of  others  is  indicated  by  the 
amount  of  the  price  attached  to  that  power. 

As  a  basis  for  understanding  the  significance  of  some 
general  principles,  certain  facts  of  ownership  and  wealth 
are  necessary  at  the  outset.  These  facts  fall  roughly  into 
the  following  main  classes : 

1.  The  total  stock  of  wealth  of  the  nation. 

2.  The  annual  income  of  the  nation. 

3.  The  proportion  of  the  annual  income  consumed  to 
that  saved  to  be  used  for  further  production. 

4.  The  proportions  of  the  income  of  all  classes  for  ser- 
vices rendered  and  for  possession  of  property. 

5.  The  relative  fractions  of  the  national  income  going 
to  wages,  rent,  interest  and  profit. 

6.  The  inequalities  of  property  ownership  between  in- 
dividual persons. 

7.  The  inequalities  of  income  between  individual  per- 
sons. 

After  these  facts  are  in  mind,  it  will  be  possible  to  ex- 
plain some  of  the  forces  and  influences  which  make  them 
what  they  are. 

1.  The  total  stock  of  wealth  of  the  nation  in  1904  was 
approximately   $107,000,000,000.     Subsequent   capital   ac- 

1  H.  J.  Davenport,  "Economics  of  Enterprise,"  Chapters  II-III. 


178  Capital 

cumulation  through  the  excess  of  production  above  con- 
sumption had  brought  the  total  up  to  about  $187,000,- 
000,000  in  1912.  When  measurement  is  made  by  the 
changed  price  levels,  following  the  war,  the  national  wealth 
would  have  been  in  June,  1920,  about  $400,000,000,000. 
The  decline  of  price  levels  since  that  date  would  again  alter 
the  price  index  of  the  national  wealth.  Obviously,  the 
fluctuations  in  price  levels  do  not  mean  that  the  national 
wealth  is  fluctuating  in  like  manner.  The  money  stand- 
ard of  measurement  changes,  but  the  wealth  does  not  un- 
dergo corresponding  ups  and  downs.  The  wealth  itself, 
in  terras  of  coal  and  iron,  food  and  cotton  and  wool,  gold 
and  silver,  automobiles  and  land,  factories  and  machinery, 
carries  a  fluctuating  money  price,  but  the  actual  goods  do 
not  fluctuate  in  like  proportions.  This  unstable  relation- 
ship between  prices  and  the  goods  themselves  makes  the 
method  of  measuring  wealth  in  money  units  somewhat  un- 
satisfactory, and  yet  money  is  the  only  common  unit  of 
measurement  of  all  forms  of  economic  wealth.  Moreover, 
when  the  money  measure  of  wealth  is  understood  for  the 
thing  it  is, — a  fluctuating  measure, — it  allows  a  fairly  ac- 
curate impression  of  the  volume  of  the  nation's  wealth. 
The  figures  which  have  been  given  here  should  be  taken  as 
rough  approximations.  No  official  estimate  of  the  nation's 
wealth  has  been  made  since  1912  and  consequently  these 
figures  represent  non-official  calculations.  The  purpose  is 
simply  to  give  a  mass  impression  of  the  nation's  total 
economic  wealth.^ 

2.  The  annual  income  of  the  nation.  The  income  of 
the  nation  in  any  single  year  is  a  matter  different  from 
the  total  accumulation  of  wealth  at  the  time.  The  nation's 
annual  income  in  1913  is  estimated  at  about  $34,400,000,- 
000.  By  1918  the  income  was  estimated  at  approximately 
$61,000,000,000.  After  the  proper  discount  is  made  for 
differences  in  price  levels  for  the  two  years,  the  1918  income 
represents  an  increase  of  physical  output,  an  increase  in 

iSee  "Wealth,  Debt  and  Taxation,"  1913,  United  States  Census; 
Sir  Edgar  Crammond,  Bankers  Institute,  London,  1920;  Sir  Josiah 
Stamp,  Journal  of  the  Royal  Statistical  Society,  July,  1919, 


Capital  179 

volume  of  production,  of  from  10  to  15  per  cent,  over  the 
1913  level.  Moreover,  the  annual  income  of  the  nation 
prior  to  1913  had  been  steadily  mounting.  The  average 
income  per  capita  in  1913  was  practically  double  the 
figure  for  1880.  The  gain  in  actual  volume  of  production 
during  the  war  period  has  not  been  maintained  during  the 
post-war  period,  due  in  part  to  labor  inefficiency,  to  aban- 
donment of  war  emergency  motives  and  organization,  and 
to  business  depression.  The  annual  income  for  1920  has 
been  estimated,  in  the  price  levels  of  that  year,  at  ap- 
proximately $65,000,000,000.^ 

When  a  view  is  taken  of  annual  income  over  a  period  of 
several  decades,  it  is  found  that  since  1850  the  income  in 
terms  of  actual  purchasing  power  has  more  than  trebled. 
This  enormous  increase  in  annual  income  is  attributable 
primarily  to  the  advent  of  the  revolutionary  improvements 
in  machinery  and  scientific  production.  With  the  utiliza- 
tion of  natural  power,  the  application  of  electrical  energy, 
the  countless  inventions  of  mechanical  devices,  the  erection 
of  factory  equipment,  the  development  of  natural  resources 
and  the  advances  made  in  a  million  ways  in  all  the  in- 
dustrial arts  and  sciences,  the  productive  capacity  of  the 
individual  worker  has  grown  steadily.  No  one  familiar 
with  the  state  of  the  industrial  arts  and  sciences  would 
intimate  that  this  development  has  reached  its  limit.  On 
the  contrary  the  future  appears  to  be  filled  with  possibili- 
ties of  discovery  and  invention  of  incalculable  importance. 

Of  course  the  mere  increase  in  the  total  volume  of  an- 
nual income  is  no  guaranty  that  the  new  total  will  be 
well  distributed.  Unless  the  greater  volume  is  wisely 
divided  among  all  groups,  so  as  to  make  constantly  for  a 
higher  degree  of  common  welfare,  the  new  volume  could 
scarcely  justify  itself.     But  assuming  a  wise  distribution, 

1  For  income  data,  see  National  Bureau  of  Economic  Research, 
"Income  of  the  United  States,"  pp.  f)4-6f),  79,  Chapters  II.  IV;  King, 
"Wealth  and  Income  of  the  United  States,"  p.  120,  Chapter  VI; 
Kemmerer,  "nin;h  Prices  and  Deflation,"  Chapter  I;  W.  W.  Stewart, 
Economic  Review,  Vol.  XI,  pp.  57-82;  E.  E.  Day,  Remew  of  Economic 
Statistics,  September-December,  1920;  D.  Friday,  Journal  of  Political 
Economy,  Vol.  26,  pp.  952-969;  Vol.  27,  pp.  117-126. 


180  Capital 

the  foundation  for  a  rising  standard  of  living  for  every- 
body and  a  general  human  and  material  advance  rests 
in  the  increased  producing  capacity  of  the  country  due 
to  the  development  of  the  mechanical  and  scientific  basis 
of  modern  industry. 

3.  The  proportions  of  the  national  income  saved  and 
consumed.  The  national  income  may  roughly  be  divided 
into  a  portion  calculated  for  immediate  consumption  and 
a  portion  set  aside,  and  saved  as  a  means  to  further 
production.  In  the  one  class  would  belong  the  food 
of  the  family  table,  the  overalls  and  the  evening  gowns 
of  the  various  classes,  the  shoes  and  hats,  the  houses  and 
automobiles, — anything  and  everything  that  is  used  up  at 
the  time  by  the  consumers  of  the  country.  In  the  latter 
class  would  belong  the  factory  buildings,  the  research  lab- 
oratories, the  machines  and  work  benches,  the  trucks  and 
railroad  equipment, — the  entire  outfit  of  productive  capi- 
tal which  is  utilized  to  maintain  the  production  of  the 
country  from  year  to  year.  In  the  year  1910,  from  6.5 
to  10  per  cent,  of  the  income  was  saved,  the  balance  con- 
sumed. In  the  year  1913,  about  20  per  cent,  of  the  income 
was  saved,  and  about  80  per  cent,  consumed.  In  the  ab- 
normal war  year,  1918,  about  30  per  cent,  was  saved  and 
about  70  per  cent,  consumed.  The  normal  peace  time  sa- 
vings range  within  the  percentages  for  1910  and  1913.  J. 
A.  Hobson  has  estimated  that  in  England  the  average  an- 
nual savings  amount  to  about  three-twentieths  of  the  total 
annual  income.  Obviously,  the  great  bulk  of  the  nation's 
income  goes  into  consumption.  But  it  is  out  of  the  saved 
fraction  of  the  income  that  the  productive  equipment  of 
the  country  is  built  up  and  expanded.  If  the  propor- 
tion saved  becomes  too  small,  the  future  productive  equip- 
ment of  the  country  is  dwarfed,  and  the  basis  for  the 
annual  income  of  the  next  generation  is  undermined.  Sav- 
ing is  an  imperative  economic  virtue  under  the  present 
economic  regime.  A  nation  which  launches  into  an  orgy 
of  expenditure  for  goods  to  satisfy  the  needs  of  the  mo- 
ment, and  forgets  thrift  and  saving,  may  enjoy  itself  for 
the  time  being,  but  foresight  and  precaution  call  for  a  high 


Capital  181 

ratio  of  saving  out  of  the  nation's  income.  An  abundant 
amount  of  productive  capital  in  the  country  is  the  only- 
means  by  which  the  high  national  income  can  be  main- 
tained year  in  and  year  out.^ 

4.  The  proportions  of  national  income  for  service  and 
for  ownership.  From  another  important  standpoint,  the 
national  income  divides  itself  into  two  classes:  one,  that 
going  as  a  reward  for  work  performed  and  services  ren- 
dered by  human  activity ;  the  other,  that  going  to  the  hold- 
ers of  property  by  virtue  of  their  claim  of  ownership. 
"Work  and  property  are  the  two  great  categories  upon 
which,  in  approaching  the  problem  of  distribution,  we 
should  concentrate  our  attention.  "^  The  former  category 
covers  wages,  salaries,  fees,  etc.,  reward  for  effort  expended, 
mental  or  manual  or  both.  The  latter  covers  interest, 
dividends,  or  rent, — that  is,  reward  because  the  owner  of 
property  has  loaned  or  invested  his  savings.  Generally, 
the  two  classes  are  fairly  distinct.  The  owner  of  bonds 
to  the  amount  of  $1,000,000  draws  an  interest  of  perhaps 
5  per  cent.,  the  interest  being  a  reward  for  ownership. 
The  wage  worker  in  the  factory  where  the  million  dollars 
is  invested  draws  a  wage  of  perhaps  $1200,  the  wage  being 
a  reward  for  effort  of  hand  and  brain.  The  president  of 
the  company  draws  a  salary  of  perhaps  $50,000  as  a  reward 
for  his  services  as  an  executive.  He  may  at  the  same  time 
own  bonds  or  stock  in  the  company  upon  which  he  receives 
property  income  in  interest  or  dividends.  The  president 
of  the  concern  in  that  case  receives  both  an  effort  income 
and  a  property  income.  However  the  two  sources  of  in- 
come distribution  remain  distinct.  They  are  separate 
shares  of  the  income  of  the  individual,  and  in  the  aggre- 
gate stand  out  as  separate  shares  of  the  total  national  in- 
come. 

The  statistics  of  the  case  are  too  incomplete  to  allow  a 
precise  estimate  of  the  ratio  between  the  two  shares,  but 
approximations  are  possible  and  for  all  general  purposes 

1  See  D.  Friday,  "Profits,  Wages  and  Prices,"  Chapter  V:  also  in 
The  New  Republic,  Vol.  XXTX,  pp.  64-67;  King,  op.  cit.,  132-137. 

2  H.  G.  Dalton,  "The  Inequality  of  Incomes,"  p.  175. 


182  Capital 

these  approximations  are  highly  useful.  Hugh  Dalton  has 
estimated  the  relative  shares  received  for  property  and 
for  effort  in  the  following  amounts :  ^ 

Share  of  Property     Share  of  Effort 
per  cent  per  cent 

United  Kingdom  32  68 

United  States  29  71 

France 39  61 

Italy 26  74 

The  share  of  property  ranges  therefore  in  the  vicinity  of 
30  per  cent,  of  the  total  income  fund.^  This  ratio  however 
fluctuates  a  great  deal  with  different  years.  During  the 
years  1916  and  1917  the  share  of  the  annual  income  which 
went  in  the  form  of  wages  and  salaries  was  comparatively 
low.  It  amounted  probably  to  less  than  %  of  the  total. 
But  in  the  following  two  years,  the  share  of  wages  and 
salaries  mounted  high,  rising  to  approximately  %  of  the 
total  income.  The  variations  arise  from  fluctuations  in 
price  levels,  in  the  system  of  taxation,  in  labor  efficiency, 
and  in  wage  rates.^  The  essential  concept  is  the  fairly 
stable  ratio  between  incomes  for  doing  and  incomes  for  own- 
ing. The  incomes  for  doing  amount  to  more  than  double 
the  incomes  for  owning. 

The  justification  for  this  ratio,  the  good  or  harm  com- 
ing from  it,  and  the  causes  perpetuating  it,  give  rise  to 
intricate  and  difficult  questions.  They  are  best  approached 
by  viewing  ownership  as  an  institution.  An  analysis  of 
the  institution  of  ownership  and  private  property  will 
therefore  be  made  in  the  latter  portion  of  this  section.* 

5.  The  proportions  of  income  going  to  wages,  interest, 
rent,  profits,  etc.  The  fractions  of  the  total  income  as- 
signable to  each  of  these  factors  are  of  necessity  approxi- 
mations. They  can  lay  no  claim  to  close  accuracy,  and  yet 
they  have  a  very  real  value  in  that  they  give  a  rough  pic- 
ture of  the  stream  of  income.    This  picture  is  essential  for 

1  Op.  cit.,  p.  209. 

2  National  Bureaii  of  Economic  Research,  Income  of  the  United 
States,  pp.  97-108,  145. 

3  David  Friday,  "Profits,  Wages  and  Prices,"  pp.  124-125,  130. 

4  See  below,  pp.  193-215. 


Capital  183 

a  genuine  conception  of  the  working  of  the  economic  sys- 
tem. Rent  claims  approximately  8  per  cent,  of  the  total 
income.  The  share  of  rent  has  remained  fairly  constant 
since  1850.  This  8  per  cent,  represents  the  income  for 
ownership,  which  flows  to  those  who  have  the  title  of 
possession  to  the  land  of  the  country.  It  is  primarily  an 
income  for  owning  rather  than  for  doing. 

Profits  claimed  in  1910  about  27.5  per  cent,  of  the  total 
income.  Profits  in  this  sense  of  the  term  refers  partly 
to  income  for  effort,  skill  of  management,  service  rendered, 
etc.,  but  chiefly  to  income  for  ownership.  Although  the 
major  part  of  profits  represents  income  for  ownership, 
nevertheless  the  ratio  between  the  two  is  not  a  matter  of 
exact  statistical  record  up  to  the  present  time.  Profits  is 
therefore  loosely  used  in  this  estimate.  In  1918,  the  in- 
dividuals and  corporations  reporting  to  the  Bureau  of  In- 
ternal Revenue  indicated  that  the  total  of  business  profits 
for  the  year  was  $14,500,000,000,  or  about  21  per  cent,  of 
the  total  income  for  the  year.  ^ 

Interest  claims  from  5  to  9  per  cent,  of  the  product, 
varying  with  the  year  in  question.  Interest  as  here  used 
covers  the  return  on  bonds  and  notes,  but  not  the  dividends 
on  stocks.  Interest,  like  rent  and  a  part  of  profits,  is  a 
reward  for  ownership.  It  is  paid  to  the  owner  of  property 
or  the  holder  of  credit  as  a  property  income  rather  than 
as  an  income  for  effort  and  workmanship.^ 

There  is  nothing  invidious  in  pointing  out  the  relation 
between  these  factors  of  income  for  owning  rather  than 
for  doing.  The  function  of  ownership  is  indispensable  in 
the  economic  process  under  a  private  property  regime, 
and  there  is  nothing  derogatory  in  income  based  upon  that 
function.  Owning  is  however  a  distinctly  different  function 
from  doing,  and  the  clear  separation  of  the  two  bases  of 
income  is  of  real  importance. 

6.  Personal  inequalities  of  property  ownership.  In  the 
United  States,  1  per  cent,  of  the  population  owns  approx- 

1  David  Friday,  American  Econmnic  Revietv,  Sup.,  March,  1920, 
p.  22. 

2  On  above  data,  see  Kinp,  op.  cit.,  pp.  158-160;  Bowley,  "Division 
of  the  Product  of  Industry,"  pp.  42-45. 


184  Capital 

imately  one-half  of  the  total  wealth  of  the  country.  Own- 
ership is  largely  concentrated  in  the  hands  of  a  few.  ^  In 
the  more  advanced  industrial  countries,  a  large  majority 
of  the  population  is  virtually  propertyless.  Three-fifths 
of  the  population  in  such  countries  as  the  United  States, 
the  United  Kingdom,  France  and  Prussia  are  without  own- 
ership of  any  considerable  property.  It  has  been  estimated 
that  in  New  York  City,  as  much  as  two-thirds  of  the  popu- 
lation are  without  any  registered  property.-  In  these 
modern  industrial  communities,  the  richest  2  per  cent, 
of  the  people  own  considerably  more  than  all  the  rest 
of  the  people  taken  together.  This  extreme  inequality  of 
ownership  indicates  in  a  modern  democracy  two  classes, 
side  by  side,  the  one  loaded  with  enormous  possessions,  the 
other  destitute  of  any  property  save  the  more  immediate 
necessities  of  life.  ^  In  the  large  industrial  centers,  prob- 
ably 90  per  cent,  of  the  wage  workers  are  propertyless. 
Only  a  negligible  few  wage  earners  in  New  York  City 
own  their  own  homes,  * 

The  middle  classes,  comprising  about  one-third  of  the 
population,  own  about  one-third  of  the  property  of  the 
country.  Clearly,  the  extremes  of  concentration  take  place 
in  thase  limited  circles  occupied  by  the  very  well  to  do. 
Their  stack  of  property  mounts  to  the  sky  while  the  pile 
of  the  great  mass  of  wage  workers  is  of  pigmy  propor- 
tions. 

It  folijws,  therefore,  that  the  great  bulk  of  the  income 
for  owning  rather  than  doing  goes  to  a  very  small  frac- 
tion of  the  population.  The  giant's  share  of  property  in- 
come goes  to  the  richest  1  or  2  per  cent,  of  the  population. 
The  income  of  the  lower  two-thirds  of  the  population  is 
almost  exclusively  an  income  for  physical  and  mental  ef- 
fort. They  receive  virtually  no  income  for  owning,  for 
they  own  virtually  nothing.     Property  income  centers  in 

1  R.  T.  Ely,  "Property  and  Contract  in  their  Relations  to  Wealth," 
p.  319. 

2  Ibid.,  pp.  318-319. 

3  W.  I.  King,  "Wealth  and  Income  of  People  of  United  States," 
p.  96. 

4R.  Hunter,  "Poverty,"  pp.  42-43. 


Capital  185 

the  property  owners.  This  contrast  is  most  violently 
marked  when  the  largest  single  fortune  in  the  United 
States  is  compared  with  the  propertyless  condition  of  the 
mass  of  the  population.  This  fortune  was  estimated  in 
1915  at  about  $1,000,000,000,  and  is  equivalent  to  the  wealth 
of  2,500,000  of  those  classed  as  in  the  lower  levels  of 
society.^ 

The  causes  of  these  inequalities  and  their  effects  upon 
society  require  an  analysis  of  private  property  as  an  institu- 
tion. The  institution  provides  an  organization  of  econ- 
omic forces  of  which  this  gross  inequality  is  the  natural  out- 
come. Any  other  outcome  would  involve  an  alteration  of 
some  characteristics  of  the  institution.  This  institutional 
analysis  will  be  undertaken  later  in  this  chapter. 

7.  Personal  inequalities  of  income.  In  the  United 
Kingdom,  pre-war  estimates  put  one-half  of  the  total  in- 
come of  the  nation  in  the  hands  of  about  12  per  cent. 
of  the  people,  and,  what  is  more  striking,  one-third  of  the 
total  income  in  the  hands  of  about  3  per  cent,  of  the  popu- 
lation. 2  In  the  United  States,  that  richest  1  per  cent. 
of  the  population  which  owns  about  one-half  the  wealth 
receives  approximately  15  per  cent,  of  the  income.  This 
brings  the  facts  to  the  point  where  it  is  apparent  that  the 
inequalities  of  income  are  not  so  great  as  the  inequalities 
of  ownership.  The  total  income  of  the  masses  of  workers 
is  not  reckoned  upon  any  property  basis,  but  upon  a  wage 
or  salary  basis.  "The  working  man,  commonly,  receives 
more  income  in  a  year  than  the  total  value  of  his  pos- 
session while  the  rich  man's  income,  being  composed  largely 
of  rent,  interest,  and  dividends,  will,  ordinarily,  constitute 
but  three  to  ten  per  cent,  of  his  wealth. '  '^  But  this  is  not  to 
imply  that  the  inequalities  of  income  are  not  carried  to 
startling  extremes.  Indeed,  if  the  greater  inequalities  of 
ownership  were  not  already  in  mind,  these  inequalities 
of  income  would  seem  staggering  enough  in  themselves.  The 
richest  fifth  of  the  families  in  the  United  States  claims 

1  Federal  Commission  on  Industrial  Relations,  Vol.  I,  pp.  32-34. 

2  Sir  L.  C.  Money,  "Riches  and  Poverty,"  Chapter  III. 

3  W.  I.  King,  op.  cit.,  p.  231. 


186  Capital 

about  half  the  income.^  To  put  the  facts  of  income  and 
ownership  side  by  side,  it  may  be  stated  that  one-half  of 
the  income  goes  to  the  richest  fifth  of  the  people  whereas 
one-half  of  the  wealth  is  owned  by  one  one-hundredth  of 
the  people.^ 

The  full  effect  of  the  war  period  upon  inequalities  of  in- 
come has  not  yet  been  measured.  One  impressive  fact 
is  the  number  of  incomes  of  $50,000  or  over.  They  were 
estimated  at  about  27,000  in  1917  and  21,000  in  1918.  In 
1917  there  were  141  individuals  whose  annual  income  was 
one  million  dollars  or  over.  In  1918,  there  were  67  people 
listed  in  the  same  class.  At  the  other  end  of  the  scale  there 
were  over  85  per  cent,  of  the  population  gainfully  em- 
ployed whose  incomes  did  not  mount  high  enough  to  list 
them  in  the  $2,000  per  annum  class.  The  incomes  of  the 
largest  property  owners  make  up  a  huge  share  of  the  total 
income  of  the  nation,  and  the  inequalities  between  these 
two  great  groups  of  the  population  are  enormous.^ 

Any  attempt  to  understand  the  problem  of  ownership, 
wealth  and  income  must  begin  with  a  vivid  conception  of 
these  inequalities.  The  extremes  of  income,  the  violent  con- 
trasts between  the  most  well-to-do  and  the  least  well-to-do 
are  the  center  of  the  picture  of  income  distribution. 

In  the  higher  income  classes,  the  ratio  between  income 
for  owning  and  income  for  doing  is  also  significant.  Ap- 
proximately one-half  of  the  incomes  between  $3000  and 
$4000  arises  from  personal  services,  the  other  half  from 
ownership.  "When  incomes  reach  the  $10,000  figure,  the 
share  due  to  personal  service  is  reduced  to  one-fourth, 
whereas  the  share  due  to  owTiing  rises  to  about  three- 
fourths.  When  incomes  reach  the  figure  which  ranks  the 
individuals  as  millionaires,  the  share  due  to  personal  ser- 
vices falls  to  about  14  per  cent.  When  incomes  pass 
the  $1,000,000  mark  annually,  the  share  for  personal  ser- 
vices declines  to  a  trifle  over  4  per  cent.     Obviously,  the 

1  King,  op.  cit.,  p.  235. 

2  On  above  data,  see  National  Bureau  of  Economic  Research,  op. 
cit.,  pp.  108-143,  147. 

3  See  Statistics  of  Income,  1918,  United  States  Bureau  of  Internal 

Revenue. 


Capital  187 

liigher  the  income,  the  lower  the  proportion  due  to  per- 
sonal services,  and  the  greater  the  proportion  due  to  owner- 
ship.^ 

The  statistics  of  wealth,  income  and  ownership  are  of 
importance  because  they  give  a  quantitative  conception  of 
the  actual  facts.  By  setting  the  various  phases  of  the  in- 
stitution of  wealth  and  ownership  in  their  right  proportions, 
the  statistics  supply  the  economic  observer  with  fairly  ac- 
curate mental  pictures  of  the  relative  size  and  strength  of 
the  several  factors  entering  into  thought  on  the  broad 
problems  of  wealth. 

Interpretation  of  the  Facts 

An  interpretation  of  these  facts  may  well  begin  with 
the  first  two  groups  in  the  classification,  namely,  the  total 
stock  of  wealth  and  the  total  income  of  the  nation.  The 
significance  of  wealth  and  income  for  a  nation  is  con- 
ditioned by  a  number  of  fundamental  factors.  "Wealth  and 
income  are  greatest  for  a  nation  which  is  abundantly  en- 
dowed with  natural  resources.  A  nation  which  is  defi- 
cient in  such  basic  natural  resources  as  coal  and  iron  is 
severely  restricted  in  its  volume  of  wealth.  Wealth  and 
income  tend  to  be  greatest  where  the  agricultural  soil  is 
fertile  and  large  in  area ;  where  mineral  supplies  are  of  high 
quality,  easy  of  access,  and  vast  in  quantity;  where  rivers, 
lakes  and  sea  coast  are  favorable  for  commerce,  and  where 
the  topography  of  the  country  is  favorable  to  elaborate 
transportation  systems.  These  qualifications  do  not  insure 
a  high  national  income ;  they  merely  offer  a  possible  founda- 
tion for  national  prosperity.  The  qualities  of  the  national 
population  determine  the  extent  to  which  material  resources 
will  be  converted  into  national  prosperity.  That  people 
which  contains  men  of  strong  initiative,  leaders  who  are 
willing  to  take  great  risks  in  the  development  of  the  coun- 
try's supplies  of  materials,  organizers  who  have  an  instinc- 
tive drive  toward  organizing  all  of  the  factors  of  production 
and  distribution,  and  individuals  who  have  the  ability  and 
genius  to  become  great  captains  of  industry — will  con- 
1  D.  Friday,  Journal  of  Political  Economy,  Vol.  26,  p.  962. 


188  Capital 

vert  most  completely  the  raw  resources  of  a  country  into 
national  prosperity.  Moreover  the  character  of  the  labor- 
ing population  will  condition  the  use  made  of  a  founda- 
tion of  rich  resources.  A  labor  population  which  is  of 
relatively  high  intelligence,  which  has  physical  stamina 
and  vigorous  instincts,  which  has  aptitudes  for  craftsman- 
ship or  adaptability  to  the  discipline  of  mechanical  indus- 
trial processes, — is  favorable  to  a  successful  utilization  of 
the  raw  resources  of  the  country.  In  a  broader  way,  the 
whole  social  system  of  a  country  conditions  the  relations 
between  national  resources  and  national  prosperity.  The 
extent  to  which  class  lines  are  drawn  in  the  social  structure, 
the  moral  and  social  standards  of  the  upper  and  lower 
levels  of  population,  the  effect  of  customs  of  consumption 
upon  the  character  and  ideals  of  a  people,  the  personality  of 
the  average  citizen  in  his  social  surroundings, — all  these  in- 
fluence the  volume  of  income  and  of  wealth,  and  determine 
what  their  component  elements  shall  be.  The  broad  truth 
of  the  matter  is  that  the  entire  economic  structure  of  each 
generation,  its  technological  development,  its  manner  of  in- 
dustrial organization,  and  its  social  institutions  generally, 
shape  the  economic  energies  of  the  nation,  and  determine 
what  kind  of  product  shall  be  prized  in  the  nation,  how 
much  of  it  shall  be  desired,  and  how  much  of  it  can  be 
actually  produced. 

The  wealth  of  the  country  has  been  spoken  of  thus  far 
mainly  as  an  accumulation  of  goods  and  commodities. 
This  conception  of  wealth  is  true  to  the  facts  of  the  case, 
but  it  needs  a  further  interpretation  in  order  to  make  clear 
its  primary  meaning  from  the  human  standpoint.  The 
goods  in  and  of  themselves  would  be  worthless  unless  they 
contributed  to  the  satisfaction  of  the  needs  and  wants 
of  men.  Hence,  the  stream  of  commodities  belonging  to  a 
people  constitutes  also  a  stream  of  satisfactions  of  human 
wants.  This  latter  stream  is  properly  conceived  as  a  stream 
of  welfare.  When  wealth  is  viewed  as  a  stream  of  wel- 
fare, it  should  be  viewed  from  the  standpoint  of  producers 
as  well  as  consumers.  For  instance,  clothing  of  excellent 
quality  may  bring  real  welfare  to  the  consumer  who  wears 


Capital  189 

it;  but  if  the  producer  of  the  clothing  worked  in  a  sweat- 
shop at  inadequate  wages  and  under  conditions  which 
harmed  him,  body  and  soul,  then  the  clothing  is  a  form 
of  wealth  which  represents  welfare  to  consumers  only, 
and  not  to  producers.  Therefore  a  huge  national  income 
which  entailed  human  damage  to  those  engaged  in  produc- 
ing it  would  represent  a  very  low  stream  of  producer's  wel- 
fare. It  would  not  merely  bring  producer's  degradation 
instead  of  producer's  welfare,  but  it  would  so  affect  the 
producer  that  when  he  assumed  his  role  as  a  consumer, 
he  would  be  disqualified  mentally  and  physically  from  that 
standard  of  enjoyment  and  satisfaction  which  brings  con- 
sumer's welfare.  Hence  wealth  may  be  viewed  as  welfare 
to  the  extent  that  it  constitutes  a  stream  of  welfare  to  men. 
in  their  dual  role  of  producers  and  consumers.  Wealth 
which  represents  welfare  to  those  who  make  it  and  welfare 
to  those  who  consume  it,  is  the  only  form  of  wealth  which 
nations  can  afford  to  be  proud  of.^  A  view  of  wealth  as 
both  producer's  and  consumer's  welfare  is  therefore  neces- 
sary. 

In  interpreting  the  third  classification,  the  proportions 
of  income  consumed  and  saved,  the  virtue  of  thrift  comes 
into  prominence.  The  material  progress  of  a  nation  is  ac- 
complished because  there  is  an  excess  of  production  above 
consumption,  and  the  excess  takes  the  form  of  new  mechan- 
ical equipment,  improved  transportation  facilities,  and 
economic  capital  of  all  sorts  suited  for  carrying  on  future 
productive  activity.  A  nation  which  consumes  imme- 
diately all  or  nearly  all  that  it  produces,  is  rushing  to- 
ward the  day  when  its  machinery  will  be  worn  out,  its 
railroads  depreciated,  its  buildings  crumbling,  with  little 
or  no  new  equipment  to  replace  the  old.  The  technical 
equipment  of  a  modern  economic  society  increases  in  pro- 
portion to  the  extent  to  which  people  save  part  of  their 
income  and  invest  it  in  some  form  of  capital  that  will  aid 
in  carrying  on  production.     National  power  and  prestige 

1  For  an  excellent  and  elaborate  discussion  of  consumer's  welfare, 
see  A.  C.  Pigou,  "Wealth  and  Welfare,"  and  of  producer's  welfare, 
see  J.  A.  Hobson,  "Work  and  Wealth,  A  Human  Valuation." 


190  Capital 

in  the  present  world  situation  depends  in  fundamental  re- 
spects upon  the  willingness  of  the  nation  to  set  aside  part 
of  its  earnings  for  the  uses  of  the  future.  The  nations 
which  can,  by  wise  saving,  increase  the  amount  of  efficient 
machinery  per  capita,  and  the  amount  of  horsepower,  de- 
rived from  steam,  electric,  water  or  other  power  sources, 
that  is  at  the  aid  of  each  worker,  and  the  supply  of  other 
necessary  capital,  has  laid  the  foundations  for  an  increase 
of  production  for  the  nation  and  an  increase  of  income  for 
the  average  individual.  Increase  of  capital  equipment  mul- 
tiplies the  productive  efficiency  of  the  individual  worker 
and  of  the  nation,  and  the  rate  of  increase  is  measured  by 
the  rate  of  national  saving,  i.e.,  the  annual  excess  of  produc- 
tion over  consumption. 

Two  sources  of  savings  command  prior  attention:  the 
incomes  of  individuals,  and  the  incomes  of  corporations. 
Individual  thrift  is  a  virtue  for  rich  and  poor  alike.  Of 
course,  it  is  a  virtue  which  is  the  easier  practiced  the 
greater  the  individual's  income.  A  person  with  large  in- 
come may  make  large  savings  with  comparative  ease,  while 
a  person  with  a  living  wage  senses  a  real  sacrifice  for  each 
dollar  saved.  For  the  latter  person  as  for  the  former, 
the  savings  represent  a  source  of  personal  gain  and  per- 
sonal security.  The  savings  of  the  wage  earner  may  draw 
interest  in  a  savings  bank  or  elsewhere,  and  are  available 
for  some  possible  future  emergency  when  the  worker  has 
lost  his  job,  or  has  to  meet  a  doctor's  bill,  or  has  to  cope 
with  some  other  urgent  need.  The  savings  of  the  person  of 
large  income  contribute  to  the  accumulation  of  a  personal 
fortune,  with  all  that  a  fortune  means  in  the  form  of 
power,  prestige  and  economic  freedom  and  security.  At 
the  same  time  that  saving  results  in  personal  gain,  it  also 
results  in  national  gain,  for  it  swells  the  amount  of  the 
total  fund  of  savings  and  thereby  increases  the  productive 
equipment  and  economic  efficiency  of  the  country  as  a 
whole.  Thrift,  therefore,  benefits  both  the  individual  and 
the  nation. 

Although  thrift  is,  by  every  rule  of  logic,  a  real  public 
and  private  virtue,  nevertheless  it  is  a  virtue  which  the 


Capital  191 

individual  finds  it  exceedingly  difficult  to  practice.  The 
difficulty  arises  from  the  psychology  of  the  situation.  In- 
come spent  immediately  buys  immediate  welfare,  im- 
mediate enjoyment,  immediate  satisfaction,  whereas  income 
saved  represents  postponed  welfare,  and  postponed  en- 
joyment. The  temptations  to  satisfy  the  individual's 
immediate  cravings  are  so  universal,  and  so  allur- 
ing that  it  is  vastly  easier  to  spend  income  and  satisfy 
the  cravings  than  to  deny  the  immediate  temptations  to 
enjoyment  and  comfort  and  to  dwell  with  sweet  satisfac- 
tion upon  the  logical  virtues  of  frugality.  Frugality  it- 
self must  be  made  to  satisfy  such  primary  instincts  as 
the  motive  to  care  for  one's  family  in  the  future,  or  the 
motive  to  win  prestige  and  power  through  large  economic 
possessions,  or  the  motive  to  imitate  others  in  following  a 
social  custom  which  makes  economy  more  a  source  of  social 
distinction,  and  extravagance  less  so,  than  at  present.  But 
the  organization  of  motives  of  frugality  moves  slowly,  and 
against  heavy  psychological  obstacles ;  and  in  spite  of  much 
preaching  and  propaganda  in  favor  of  thrift,  the  amount  of 
saving  among  the  bulk  of  the  population,  particularly  the 
laboring  classes,  remains  discouragingly  small.  The  psychol- 
ogy of  the  situation  will  be  clarified  somewhat  by  a  com- 
parison with  the  psychology  of  persuading  labor  union 
members  to  pay  their  dues.  Labor  unions  widely  insist  in 
their  collective  bargaining  agreements,  upon  what  is  known 
as  the  "check-off"  system.  That  is,  unions  demand  that 
union  dues  be  deducted  from  wages  before  the  wages  are 
paid.  They  desire  the  employer  to  ' '  check-off"  from  the  pay- 
roll the  amount  of  the  union  assessment,  because  if  the 
union  has  to  collect  from  each  individual  member,  the  task 
is  fraught  with  enormous  difficulties.  The  union  members 
spend  their  money  for  purposes  which  bring  immediate  en- 
joyment, and  faithful,  painful  saving  to  meet  union  dues 
is  a  most  strenuous  virtue.  Saving  is  hard,  spending  is 
easy.  This  brief  summary  of  the  psychology  of  the  matter 
applies  in  real  measure  to  incomes  which  are  large  enough 
to  meet  generously  the  individual's  needs  and  extrava- 
gances; it  applies  with  great  force  to  incomes  which  are 


192'  Capital 

so  small  as  to  meet  only  scantily  the  individual's  major 
wants.  In  fact,  for  the  lower  income  groups,  it  might  well 
be  said  that  saving  is  extremely  hard  while  spending  is 
virtually  imperative.  Cost  of  living  studies  on  a  large 
scale  have  demonstrated  that  most  working-class  families 
spend  practically  all  their  income.^ 

As  a  result  of  these  various  factors,  the  great  bulk  of  in- 
dividual saving  is  done  by  the  so-called  middle  classes, 
by  the  salaried  classes  and  by  the  property-owning  classes. 
Until  recently,  it  was  assumed  that  the  savings  made  by 
individuals  of  these  classes  varied  in  proportion  to  the  in- 
terest rate,  but  recent  studies  and  observations  point  to  the 
opinion  that  interest  rates  have  a  minor  influence  upon  the 
volume  of  individual  savings.^  Saving  which  involves  real 
abstinence  and  sacrifice  is  not  due  to  acquisitive  motives  to 
secure  high  interest,  but  rather  to  motives  to  secure  family 
protection,  economic  security,  social  prestige,  or  busi- 
ness power.  This  is  not  to  deny  some  influence  to  interest 
rates,  and  it  certainly  deserves  to  be  pointed  out  that  with- 
out interest  rates  the  fund  of  individual  savings  would  be 
inadequate  to  meet  the  nation's  needs  for  capital.  It  is, 
however,  a  false  theory  of  interest  rates  to  contend  that  the 
individual  saver  is  motivated  primarily  by  acquisitive  in- 
stincts. The  motives  to  saving  in  the  average  individual 
are  many  and  complicated,  and  the  possessive  motive,  stim- 
ulated by  interest  rates,  does  not  hold  a  dominant  position 
in  his  group  of  motives. 

The  other  source  of  savings  is  corporation  income.  Busi- 
ness men  discovered  that  individual  savings  would  not  be 
adequate  to  finance  economic  activity  and  expansion,  and 
cast  their  glance  around  for  a  source  of  savings  which  would 
supplement  individual  thrift.  They  discovered  a  source  of 
savings  in  corporation  income.  The  net  income  of  a  cor- 
poration is  rarely  paid  out  in  full  in  the  form  of  profits  or 
dividends.  A  substantial  portion  of  the  earnings  aA'ailable 
for  dividends  are  not  paid  out,  but  are  retained  in  the  cor- 
poration.    These  retained  earnings  are  then  used  to  invest 

1  Royal  Sleeker,  Monthh/  Lahor  Review,  Vol.  IX,  pp.  1-5, 

2  For  detailed  observation  see  below,  p.  447. 


Capital  193 

in  new  buildings,  new  equipment,  new  capital  of  any  sort. 
Or  they  may  remain  as  a  surplus  fund  and  be  invested  in 
bonds  or  stocks  of  other  corporations.  In  either  case,  they 
are  savings  out  of  the  corporate  income,  devoted  to  the 
maintenance  and  increase  of  productive  capital.  Suppose 
the  funds  which  are  saved  in  this  way  were  either  paid  out 
in  dividends,  or  were  reduced  by  charging  consumers  lower 
prices  for  goods.  The  result  would  be  that  the  recipients 
of  the  dividends  and  the  consumers  who  benefited  by 
lowered  prices,  would  spend  a  good  share  of  their  gains  for 
direct  consumption ;  they  would  save  only  a  fraction  of  the 
gains.  On  this  understanding  of  the  situation,  corpora- 
tions have  seen  fit  to  adopt  very  widely  the  practice  of 
tapping  income  at  the  source  and  of  "checking-off"  savings 
before  dividends  are  paid.^ 

An  interpretation  of  the  fourth  classification,  the  propor- 
tions of  income  for  effort  and  for  ownership,  necessitates 
a  broad  analysis  of  the  general  institution  of  ownership 
and  property  out  of  which  come  naturally,  steadily,  and 
persistently  such  results.  Merely  to  look  about  over  the 
maze  of  facts  gives  no  clue  to  the  natural  causes  of  those . 
facts.  The  imperative  key  to  the  situation  lies  in  some  dis- 
covery of  why  these  facts  of  wealth  and  property  have  come 
to  be  what  they  are,  why  they  tend  to  maintain  themselves 
to-day,  and  whether  by  the  nature  of  the  case  they  should 
always  retain  their  present  origins  and  consequences.  The 
only  key  which  appears  to  give  this  clue  is  a  conception 
of  ownership  of  property  as  a  social  institution.  As 
C.  H.  Cooley  has  insisted,  ownership  and  distribution 
are  "essentially  a  historical  and  institutional  phenomenon, 
economic  technique  being  for  the  most  part  only  a  mecha- 
nism through  which  social  organization  expresses  itself," 
and  "pecuniary  valuation  is  a  social  institution  no  less  than 
the  state  or  the  church."^ 

An  institution  is  a  group  of  human  tendencies  and  habits 
working  out  through  an  organized  structure.^     It  is  the 

1  For  further  details,  see  below,  pp.  449-450. 

2  "Social  Process,"  pp.  302,  308. 

3  W.  G.  Sumner,  "Folkways,"  p.  53. 


194  Cajntal 

product  of  history.  It  has  antecedents  reaching  back 
through  generations,  and  is  always  in  a  state  of  flux  and 
change.  It  is  what  it  is  to-day  because  it  was  something 
else  yesterday,  something  less  satisfying  yesterday.  It 
will  be  something  different  in  days  ahead  because  it 
is  not  fully  satisfying  to-day.  An  institution  is  on 
the  march  from  yesterday  forward  to  to-morrrow.  It  is 
dynamic.  It  grows,  develops,  moves.  This  is  not  to  deny 
that  there  are  always  forces  at  work  trying  to  keep  the  in- 
stitution static,  trying  to  preserve  the  status  quo,  trying  to 
hold  things  as  they  are.  But  this  is  only  the  conservative 
side  of  growth.  It  combines  with  another  side, — restless, 
forward-looking,  dynamic.  The  two  at  their  best  balance 
in  wholesome,  gradual,  safe  advance;  at  their  worst  they 
fight  it  out. 

If  we  view  the  church  as  an  institution,  at  its  beginning, 
then  during  the  Middle  Ages,  through  the  Reformation, 
through  the  refuge  of  persecuted  groups  in  the  early  Amer- 
ican colonies,  on  through  the  last  century  of  development 
in  America,  and  finally  in  its  present  form,  we  have  a 
fairly  clear  picture  of  the  dynamic  character  of  the  church 
as  an  institution.  Creeds,  dogmas,  rituals,  teachings,  the- 
ologies, interpretations,  beliefs,  constantly  moving  forward, 
appear  simultaneously  with  organization,  denominational 
structure,  practice,  custom,  tradition  and  innovation.^  It 
is  so  with  the  institution  of  property.  Every  little  while 
a  student  of  economic  life  throws  out  the  declaration  that 
"We  are  living  in  a  new  economic  world. "^  In  other 
words,  the  institution  is  growing. 

Obviously  then,  the  institution  of  property  as  it  exists  to- 
day is  not  fixed  and  static  in  all  its  detail  and  method.  In- 
stitutions have  much  the  same  restless  qualities  as  life.  In 
fact,  property  is  nothing  unless  a  way  of  life.  To  view 
property  as  a  static  order  is  to  miss  the  true  dynamic  nature 
of  property.  This  emphasis  is  carefully  stated  by  de 
Tocqueville  in  these  words,  "I  am  tempted  to  believe  that 
what  we  call  necessary  institutions  are  often  no  more  than 

1  Ross,  "Principles  of  Sociology,"  p.  489. 
2R.  T.  Ely,  "Property  and  Contract,"  p.  34. 


Capital  195 

institutions  to  which  we  have  grown  accustomed,  and  that 
in  matters  of  social  constitution  the  field  of  possibilities  is 
much  more  extensive  than  men  living  in  their  various 
societies  are  ready  to  imagine."^ 

The  study  of  ownership  and  property  as  a  great  social 
institution  will  be  considered  under  the  following  divi- 
sions: 

1.  The  instinctive  basis  of  the  institution. 

2.  Property  a  group  of  rights. 

3.  Ownership  as  a  corporate  phenomenon. 

The  instinctive  basis  of  the  institution  of  property.  The 
whole  institution  of  property  would  not  exercise  so  domi- 
nant an  influence  upon  the  wealth  activities  of  men  if  it 
were  not  grounded  in  powerful  traits  of  human  nature. 
Property  stimulates  and  satisfies  some  of  the  deepest  in- 
stinctive energies  of  men. 

Of  high  rank  among  these  instinctive  energies  is  the  ac- 
quisitive bent  of  human  nature.  The  impulse  to  posses- 
sion is  a  dynamic  human  fact  behind  property.  The  ca- 
pable organizer,  the  brilliant  manager,  the  business  man 
of  whatever  sort,  is  expected  to  understand  as  a  matter  of 
course  that  the  stimulus  which  will  call  forth  his  best  ef- 
fort is  the  unlimited  acquisition  of  wealth.  Indeed  the 
profit  motive  is  often  advertised  as  in  the  nature  of  things 
the  only  motive  which  can  inspire  the  truly  great  captains 
of  industry  to  direct  the  affairs  of  wealth.  Obviously,  the 
profit  motive  has  the  advantage  that  it  works.  Even 
though  it  may  stress  the  self-interest  of  the  individual  to 
an  extreme,  even  though  it  seems  often  to  subordinate 
broader  social  considerations,  it  certainly  works.  That  is, 
it  calls  forth  strenuous  effort,  it  sets  men  on  fire  with  en- 
ergy, it  commands  the  keenest  brains.  It  works  in  the 
direction  in  which  it  is  intended  to  work, — the  amassing  of 
profit  and  property. 

There  is  another  direction  in  which  it  works  only  indif- 
ferently. The  incidental  by-product  is  looked  upon  as 
socially  good.  At  any  rate,  when  men  set  out  to  acquire 
large  property,  the  pathway  to  acquisition  is  supposed  to  be 
1  "Recollections  of  de  Tocqueville,"  p.  101. 


196  Capital 

paved  with  economic  welfare  for  tlie  country,  Adam  Smith, 
taught  that  while  seeking  his  own  self-interest,  the  prop- 
erty-holder would  be  led  as  by  an  invisible  hand  to  serve 
the  common  good.  The  theory  in  this  respect  has  not  al- 
ways worked  out  well.  The  prevailing  opinion  among  en- 
gineers seems  to  be  that  profit  seeking  hinders  production 
and  subordinates  the  real  usefulness  of  the  economic  or- 
der. For  instance,  H.  L.  Gantt  writes,  "The  aim  of  our 
efficiency  has  not  been  to  produce  goods,  but  to  harvest  dol- 
lars. If  we  could  harvest  more  dollars  by  producing  fewer 
goods,  we  produced  the  fewer  goods.  If  it  happened  that 
w^e  could  harvest  more  dollars  by  producing  more  goods, 
we  made  an  attempt  to  produce  more  goods:  but  the  pro- 
duction of  goods  was  always  secondary  to  the  securing  of 
dollars."^  When  men  become  part  of  an  institution  Avhich 
impresses  upon  people  that  what  matters  most  to  a  man  is 
the  amount  of  property  he  owns,  he  is  bound  to  make  other 
things  secondary.  Even  though  the  acquisitive  motive 
builds  railroads,  extends  banks,  develops  mines,  and  or- 
ganizes factories,  and  by  and  through  them  millions  of  peo- 
ple get  their  living,  nevertheless  the  sore  spots  of  the  social 
world  and  the  bad  fortune  of  human  groups  is  also  an  out- 
put of  the  acquisitive  motive.  Without  losing  its  drive,  the 
profit  motive  can  combine  more  and  more  with  motives  of 
achievement  or  of  public  spiritedness. 

Another  motive  is  important,  the  "will  to  power."  In 
the  modern  institution  of  wealth,  the  surest  road  to  power  is 
the  gaining  of  property.  Property  is  power.  Large  property 
gives  prestige  and  influence  with  other  property-holders; 
it  causes  one's  counsel  to  be  listened  to;  and  it  gives  the 
ability  to  use  financial  force  to  put  through  new  business 
engagements.  The  instinct  of  domination  ranks  side  by 
side  with  the  instinct  of  acquisition.  "In  the  modern 
world,  power  is  realized  more  and  more  through  property." 
Hence  this  driving  trait  of  human  nature  reinforces  the 
profit  motive,  and  both  combine  in  stimulating  economic 
activity  which  drastically  stresses  self-interest  and  individ- 
ualistic gain. 

iH.   L.   Gantt,   "Organizing  for   Work,"   p.   24. 


Capital  197 

Moreover,  property  means  economic  freedom.  "For 
man,  at  all  events,  his  property  is  above  all  something  that 
he  can  rely  upon  as  a  permanent  home,  permanent  means  of 
subsistence  or  enjoyment.  Property  is  thus  an  integral  ele- 
ment in  an  ordered  life  of  purposeful  activity.  It  is,  at 
bottom  for  the  same  reason,  an  integral  element  in  a  free 
life.  .  .  .  Some  measure  of  property  appears  in  short  to 
be  the  essential  basis  of  liberty."^  One  who  lacks  prop- 
erty is  always  on  the  verge  of  trouble  and  distress.  He 
has  nothing  to  fall  back  upon  in  case  of  illness  or  accident. 
He  cannot  travel,  he  cannot  enjoy  the  best  amusements, 
he  cannot  have  the  best  education  for  his  family.  He  can- 
not take  part  in  the  game  of  business.  He  is  severely  limit- 
ed in  his  life  activities.  "Without  a  certain  amount 
of  accumulated  wealth,  a  man  is  largely  a  slave  to  his  im- 
mediate environment."  The  facts  of  wealth  which  have 
already  been  given  show  that  for  the  majority  of  men  this 
enslavement  to  immediate  environment  is  a  painful  fact. 
They  lack  the  accumulated  property  which  gives  indepen- 
dence from  the  misfortunes  and  vicissitudes  of  life  among 
the  non-propertied  levels  of  society.  To  win  property  is 
to  win  economic  freedom.  The  most  nagging  worries  of 
life  drop  out.  Security  is  attained.  The  instinctive  revolt 
against  restraint  and  confinement  is  successful;  and  the 
love  of  freedom,  the  love  of  fuller  psychological  existence 
is  satisfied.  As  William  Graham  Sumner  remarked, 
"Wealth,  therefore,  in  a  highly  organized  civilized  society, 
gives  an  emancipation  from  the  ills  of  earthly  life  which 
is  enormous." 

One  of  the  most  insistent  movements  of  the  present  time 
is  for  a  revaluation  of  the  motives  governing  property  ac- 
cumulation. ' '  The  community  needs  service  first,  regardless 
of  who  gets  the  profits,  because  its  life  depends  upon  the 
service  it  gets."^  Before  the  service  motive,  property  is  on 
the  defensive.  Property  is  face  to  face  with  the  necessity 
for  co-ordinating  the  profit  motive  with  new  motives.  At 
least,  it  is  challenged  with  the  task  of  controlling  the  profit 

lEly,  "Property  and  Contract,"  pp.  308-309. 
2  H.'  L.  Gantt,  '"Organizing  for  Work,"  p.  5. 


198  Capital 

motive  with  social  thoughtfulness.  At  first,  the  reaction 
to  such  a  challenge  is  that  a  service  motive  or  constructive 
motive,  or  public  achievement  motive  will  not  work,  that  a 
creative  motive  is  inadequate.  These  substitutes  are  not, 
so  it  is  said,  rugged,  and  virile,  and  tremendous.  How- 
ever, it  is  conspicuous  that  motives  of  creative  achievement 
and  public  well-being  have  played  a  primary  part  in  the 
motivation  of  such  indispensable  economic  groups  as  the 
inventors  and  engineers.  Among  the  professional  classes, 
the  profit  motive  is  placed  under  subjection.  Surely,  then, 
the  proposed  substitutes  are  not  as  weak  and  flabby  as 
they  might  at  first  have  seemed.  One  of  the  vital  contribu- 
tions of  psychology  to  economics  is  the  scientific  assurance 
that  the  substitute  motives  have  true  dynamic  quality,  and 
do  not  menace  the  business  game  with  a  milksop  mental 
outlook.^ 

Such  a  revaluation  of  motives  throws  light  on  the  claim 
that  property  as  now  constituted  is  a  great  developer  of 
personality.  The  race  for  property  accumulation  develops 
foresight,  self-reliance,  initiative,  self-respect,  and  a  long 
list  of  other  virtues  of  personality.  But  unquestionably  it 
at  the  same  time  encourages  certain  vices  of  personality, — 
such  as  excessive  self-interest,  misconception  of  the  primary 
importance  of  the  public  need,  and  false  valuation  of  all 
the  qualities  of  life  in  terms  of  self-gain.  But  what  of  the 
propertyless  man?  Surely  property  is  not  a  developer  of 
personality  for  him.  As  a  keen  observer  has  remarked, 
"Thus  it  has  come  about  that  the  Society  which  boasts 
of  its  reliance  on  the  freedom  of  individual  self-develop- 
ment nevertheless  allows  only  a  limited  proportion  of  its 
individual  members  to  possess  the  freedom.  It  appeals  to 
the  moralizing  influence  of  ownership ;  and  then  denies  the 
possibilities  of  any  real  ownership  to  the  main  mass  of  its 
members. '  '^  The  forces  of  the  times  demand  that  property 
must  be  less  an  individualistic  influence  on  personality  and 
more  a  social  influence.  Personality  is  a  social  product, 
and  a  wider  distribution  of  property,  combined  with  a  re- 

1  A.    E.    Zimmern,    "Nationality    and    Government,"    pp.    259-260. 

2  See  Hobhouse,  "Property,  Its  Duties  and  Rights,"  p.  184. 


Capital  199 

adaptation  of  more  social  motives  in  its  accumulation,  is 
the  general  urging  of  the  forces  now  at  work. 

If  these  considerations  are  sound,  it  is  proper  to  define 
economics  as  the  science  of  making  material  wealth  con- 
tribute most  to  human  welfare.  The  function  of  the  in- 
stitution of  property  is  then  to  serve  human  life.  If  this 
involves  a  gradual  transformation  of  motives  and  ideas  be- 
hind property,  then  the  transformation  should  be  made 
in  the  smooth  process  of  economic  growth.^  If  the  self- 
regarding  instincts  have  to  give  way  to  creative  and  ser- 
vice instincts  somewhat,  the  adjustment  is  a  part  of  the 
evolution  of  an  institution.  We  may  as  well  face  squarely 
the  fact  that  the  present  instinctive  basis  of  property  is 
not  all  that  it  should  be.  That  does  not  mean  a  drastic, 
quick,  shocking  change.  Property  is  an  institution.  Men 
have  in  the  past  been  able  fairly  well  to  reshape  institu- 
tions to  the  facts  of  human  nature  when  the  times  have 
gotten  out  of  joint,  and  should  be  able  to  do  so  again.'* 

Property  a  Group  of  Rights 

Property  has  been  defined  as  "a  bundle  of  rights." 
There  is  no  more  conspicuous  feature  of  the  institution  of 
property  than  this  overwhelming  emphasis  upon  the  rights 
of  property.^  When  the  American  Constitution  was  es- 
tablished, and  the  foundations  of  the  American  system  of 
government  and  property  laid,  the  period  was  one  which 
teemed  with  the  philosophy  of  natural  rights.  European 
countries,  France  particularly,  were  just  experiencing  the 
sensation  of  having  thrown  off  old  authorities,  traditions 
and  customs.  The  new  freedom  was  akin  to  the  freedom  of 
the  American  Revolutionary  group,  and  it  furnished  a 
soil  in  which  there  flourished  an  extreme  doctrine  of  the 
individualistic  rights  of  all  men  to  life,  liberty  and  the 
pursuit  of  happiness.  Accordingly  property  became  a  set 
of  exclusive  rights.  The  property  owner  had  inalienable 
rights  to  do  with  his  property  as  he  pleased,  subject  only 

1  A.  E.  Zimmern,  "Nationality  and  Government,"  p.  174. 
2D.  G.   Ritchie,   "Natural   Rights,"   p.  277. 
s  R.  T.  Ely,  "Property  and  Contract,"  p.  60. 


200  Capital 

to  a  minimum  of  restraint  from  excessively  anti-social 
practices.  Property  was  something  to  be  let  alone  by 
society.  It  had  inalienable  rights  to  be  let  alone.  Prop- 
erty rights  were  individual  rights,  and  this  conception  col- 
ors deeply  the  whole  institution  of  property  down  to  the 
present  day. 

One  weakness  in  this  theory  of  property  rights  has  be- 
come very  prominent,  namely,  the  implication  that  "the 
foundation  of  society  is  found,  not  in  functions,  but  in 
rights;  that  rights  are  not  deducible  from  the  discharge  of 
functions,  so  that  the  acquisition  of  wealth  and  the  enjoy- 
ment of  property  are  contingent  upon  the  performances  of 
services,  but  that  the  individual  enters  the  world  equipped 
with  rights  to  the  free  disposal  of  his  property  and  the  pur- 
suit of  his  economic  self-interest,  and  that  these  rights  are 
anterior  to,  and  independent  of,  any  service  which  he  may 
render."^  Rights  come  first  and  responsibilities  second. 
Property  is  thought  of  primarily  as  a  bundle  of  rights, 
but  not  emphatically  as  a  bundle  of  duties.  And  the  rights 
acquire  a  certain  sacredness  and  awfubiess.  They  com- 
mand a  sort  of  religious  reverence  which  will  not  bear 
analysis.  Such  rights  it  seems  sacrilege  to  question.  In 
this  atmosphere,  it  is  hard  to  make  a  clean-cut  mental  ap- 
proach to  the  problem  of  property  and  find  just  what  it  is 
all  about.  As  a  matter  of  fact,  the  so-called  rights  are 
simply  rules  of  the  institution ;  and  if  the  rules  are  capable 
of  improvement,  then  a  blind  awe  of  ancient  rights  should 
not  stand  in  the  way.  The  rules  of  the  game  are  being 
tried  out.  There  is  nothing  absolute  and  unapproachable 
about  them.  They  deserve  to  be  freed  from  superstition 
and  treated  with  the  same  common  sense  which  men  use 
in  coping  with  everyday  problems  of  life.  A  proper  in- 
fusion of  duties,  obligations,  and  responsibilities  is  indis- 
pensable, and  an  unquestioning  reverence  for  rights  as 
rights  must  give  way  to  a  proper  spirit  of  accommodation 
of  the  property  institution  to  the  needs  of  the  present 
period. 

One  phase  of  these  rights  is  the  right  to  acquire  property. 
1  R.  H.  Tawney,  "The  Atquisitive  Society,"  p.  20. 


Capital  201 

Men  have  the  right  to  engage  in  business,  make  profits, 
save  their  income,  invest,  and  accumulate.  This  right 
has  encouraged  the  boundless  initiative  and  energy  of 
the  business  community.  It  gives  a  powerful  impetus 
to  primary  instincts  and  arouses  the  ablest  men  to  the 
most  strenuous  business  endeavors.  It  has  a  similar  effect 
upon  middle-class  shop-keepers  and  to  a  large  extent  upon 
farm  groups.  It  has  however  a  scant  effect  upon  a  sub- 
stantial proportion  of  the  wage  groups  for  the  simple  rea- 
son that  the  size  of  the  wage  does  not  permit  the  accumula- 
tion of  any  great  amount  of  property.  The  average  wage 
earner  does  not  hold  a  faith  that  some  day  he  will  be  rich ; 
he  expects  to  remain  a  wage  earner  the  rest  of  his  days. 
Workers  here  and  there  with  extraordinary  instinctive  and 
mental  endowment,  force  their  way  from  the  bottom  to  the 
top,  and  acquire  a  large  amount  of  property  in  the  course 
of  a  life  time.  The  rank  and  file  of  laborers,  however, 
have  given  up  any  such  aspiration.  It  will  be  noticed  also 
that  among  the  business  groups,  this  right  to  acquire  wealth 
enjoys  a  high  degree  of  freedom  from  public  interference. 
A  man  has  the  right  to  acquire  wealth  by  manufacturing 
luxury  automobiles  when  city  populations  are  in  dire  need 
of  housing.  Men  are  very  commonly  engaged  in  manu- 
facturing commodities  which  are  the  least  needed  by  the 
great  bulk  of  the  population,  because  it  pays  better  to 
produce  those  goods,  and  they  have  the  right  to  produce 
whatever  yields  for  them  individually  the  highest  net  in- 
come. The  Government  organization  in  war  time  tem- 
porarily annulled  this  right  and  demanded  that  non-essen- 
tials should  not  be  made  when  essentials  were  needed  to 
win  the  war.  Industries  which  insisted  on  producing  non- 
essentials found  their  coal  supply  cut  off  by  the  govern- 
ment, or  requests  for  credit  refused.  And  most  business 
men  were  willing  to  give  up  for  the  time  being  the  right 
to  produce  goods  which  would  not  help  win  the  war. 
But  during  peace  times,  there  is  no  slogan  equivalent  to 
"Win  the  War."  To  produce  essentials  first,  and  on  a 
quantity  basis  at  minimum  prices  to  the  mass  of  consumers 
would  obviously  be  the  paramount  desideratum  from  a  so- 


202  Capilal 

cial  viewpoint.  But  at  the  end  of  the  war  business  men  gave 
a  sigh  of  great  relief  when  the  war-time  government  boards 
were  abolished,  and  everybody  was  free  again  to  acquire 
wealth  as  he  pleased,  on  the  old  laissez-faire  basis,  in  what- 
ever line  brought  individually  the  highest  net  income.  The 
social  forces  at  work  to-day  are  not  pressing  for  an  aboli- 
tion of  the  right  to  acquire  property,  but  they  are  decidedly 
at  work  to  make  peace-time  production  amenable  to  some 
kind  of  social  control  more  or  less  equivalent  to  the  war- 
time control  contained  in  the  slogan  "Win  the  War." 
There  is  a  social  principle  superior  to  the  mechanical  play 
of  individualistic  rights  in  the  seeking  of  property.  Pri- 
vate parties  assume  that  it  is  sound  policy  to  produce  what- 
ever pays  best,  whereas  from  a  public  viewpoint  it  is 
sound  policy  to  produce  whatever  is  needed  most.  As  a 
matter  of  fact,  it  often  occurs  that  what  pays  best  is  not 
what  is  needed  most, — hence  a  shortage  in  housing  or  in 
railroad  equipment.  The  right  to  acquire  property  requires, 
therefore,  a  degree  of  social  control. 

The  right  to  unlimited  income. — A  very  pertinent  ques- 
tion would  be,  "How  much  wealth  can  a  man  accumu- 
late?" In  the  popular  phrase,  the  answer  might  well  be, 
"The  sky  is  the  limit."  After  taxes  have  been  paid  and 
costs  have  been  met,  his  income  belongs  to  him  alone, 
whether  it  be  $3,000,000  a  year  or  $3,000.  The  property 
right  to  income  means  in  terms  of  everyday  action  that 
a  man  is  entitled  to  all  he  can  get.  This  unlimited  right 
supplies  a  perpetual  stimulus  to  the  instincts  underlying 
property:  they  are  never  satisfied  and  never  reach  a  limit. 
No  matter  how  much  the  individual  may  acquire,  he  al- 
ways has  the  right  to  acquire  more.  At  the  same  time 
that  this  right  calls  forth  strenuous  business  endeavor, 
it  also  causes  those  excessive  returns  claimed  by  profit- 
eers, usurers  and  over-avaricious  landlords.  The  right 
to  income  is  a  right  to  good  and  bad  income  alike.  Even 
during  war  time  the  right  to  income  was  not  seriously 
invaded.  Government  reports  disclosed  gross  profiteer- 
ing throughout  the  war  in  many  business  circles,  and  after 
the  armistice,  profit  figures  of  50  per  cent.,  100  per  cent. 


Capital  203 

and  even  thousands  of  per  cent.,  were  frequently  reported 
by  government  authorities/  Unless  this  positive  right  is 
balanced  by  a  commensurate  sense  of  social  responsibility, 
it  inevitably  leads  to  dangerous  excesses.  ^  ' '  The  heresy 
which  condemns  our  economic  life  is  this,  that  business  is 
primarily  a  means  of  making  wealth  for  individuals.  It 
involves  us  in  industrial  bitterness.  The  truth  which  alone 
can  bring  decency  and  happiness  is  this:  that  business 
primarily  is  an  essential  social  service  to  the  community."^ 
The  right  as  now  exercised  has  deepened  in  the  minds  of 
groups  of  people,  especially  of  wage  groups,  the  conviction 
that  employers  and  property  owners  are  steadily  using 
strong  efforts  to  exact  unreasonable  returns  for  individual 
gain.  Unrest  and  bitterness  are  greatly  stimulated,  and 
laborers  tend  to  reason  that  hard  work  on  their  part  does 
not  insure  a  commensurate  return  to  them,  but  leads  all 
too  often  to  the  property  owner  reserving  for  his  own 
fortune  the  lion's  share  of  the  increase.  The  economic 
community  has  drifted  to  a  point  where  the  emphatic 
demand  is  that  wealth-seeking  must  be  tempered  more 
genuinely  with  a  social  purpose. 

The  right  to  security  of  property  and  income. — Prop- 
erty ownership  is  deeply  entrenched  behind  the  accepted 
social  philosophy  and  the  law  of  the  land.  "What  men 
have  the  right  to  acquire,  they  also  have  the  right  to 
hold.  The  Federal  Constitution  provided  at  the  outset 
that  there  should  be  no  taking  of  private  property  with- 
out due  process  of  law.  It  also  provided  that  no  State 
could  pass  a  law  impairing  the  obligation  and  freedom 
of  contracts.  By  the  decision  of  the  Supreme  Court, 
headed  by  John  Marshall,  in  the  Dartmouth  College  case 
of  1819,  a  corporation  which  had  received  a  charter  from 
the  State  could  hold  the  charter  indefinitely,  and  the 
charter  was  not  subject  to  repeal  by  the  State.  Once 
a  privilege  was  granted,  it  was  granted  in  perpetuity.   Fol- 

1  J.  G.  Brooks,  "Labor's  Challenge  to  the  Social  Order,"  pp. 
75-85. 

2  R.  T.  Ely.  "Property  and  Contract,"  pp.  369-371. 

3  Genera]  Sir  Arthur  Currie,  before  Canadian  Pulp  and  Paper 
Aflsoc'n,    1920. 


204  Capital 

lowing  the  Civil  War,  the  Fourteenth  Amendment  to  the 
Constitution  was  passed  guaranteeing  to  all  persons  equally 
the  protection  of  the  laws,  and  when  in  1882  the  Supreme 
Court  declared  a  corporation  to  be  a  person,  the  corporate 
personality  was  firmly  protected  in  its  property  holdings 
by  the  power  of  the  Federal  Government.  The  net  out- 
come is  summed  up  by  a  conservative  American  author- 
ity, A.  T.  Hadley,  as  follows,  "The  general  status  of  the 
property  owner  under  the  law  cannot  be  changed  by  the 
action  of  the  legislature  or  the  executive,  or  the  people 
of  a  State  voting  at  the  polls,  or  all  three  put  together.  It 
cannot  be  changed  without  either  a  consensus  of  opinion 
among  the  judges,  which  would  lead  them  to  retrace 
their  old  views,  or  an  amendment  of  the  Constitution  of 
the  United  States  by  the  slow  and  cumbersome  machin- 
ery provided  for  that  purpose.  The  voter  was  omnipotent 
— within  a  limited  area.  He  could  make  what  laws  he 
pleased,  as  long  as  those  laws  did  not  entrench  upon 
property  rights.  He  could  elect  what  officers  he  pleased, 
as  long  as  those  officers  did  not  try  to  do  certain  duties 
confided  by  the  Constitution  to  the  property  holders. ' '  ^ 
Property  becomes  under  these  conditions  a  vested  in- 
terest.— "An  interest  is  vested  when  it  must  receive  in- 
demnification, if  it  is  impaired  by  public  action,  directly  or 
indirectly.  .  .  .  Vested  interests  are  largely  property  in- 
terests. ' '  ^  The  rights  of  vested  interests  have  not  always 
been  strictly  upheld.  The  abolition  of  slavery  was  a  denial 
of  the  vested  interests  of  the  slaveholder  inasmuch  as 
no  indemnification  was  given.  The  parcels  post  encroached 
upon  the  vested  interests  of  the  American  express  com- 
panies, and  the  postal  savings  banks  upon  the  vested  inter- 
ests of  private  banking  institutions.  The  prohibition 
amendment  to  the  Constitution  was  a  sweeping  blow  at  the 
vested  interests  in  the  liquor  business.  Social  necessity  in 
each  case  took  priority  over  the  vested  interests.  But 
these  are  exceptions.    The  Courts  interpret  the  Constitution 

1  The  Independent,  April   16,  1908.     See  also  S.  P.  Orth,  "Relation 
of  Government  to  Property,"  pp.  7-84. 

2R.  T.  Ely,  "Property  and  Contract,"  pp.  755-756. 


Capital  205 

in  terms  which  safeguard  property  against  confiscation. 
Any  other  attitude  by  the  courts  would  shatter  economic 
confidence  and  would  discourage  men  from  hard  business 
endeavor.  In  war  time,  conscription  of  income  was  held 
to  be  an  unwise  interference  with  vested  interests.  Social 
progress  which  impairs  the  value  of  property  has  to  re- 
imburse the  property  holder.  Hence  the  courts  insure 
a  reasonable  degree  of  security  to  the  owners  of  wealth.^ 

In  another  form,  the  right  to  security  amounts  to  the 
right  of  an  uninterrupted  income.  A  business  cannot 
continue  unless  it  steadily  meets  rent,  interest  and  profits 
charges.  "Capital  is  based  upon  security  of  expectations. 
The  investor  has  confidence  that  his  investment  will  be 
returned  to  him,  that  promises  will  be  kept.  That  is  the 
great  producing  factor  in  modern  industry. "  ^  If  property 
is  entitled  to  an  assured  income,  then  why  should  not  labor 
have  the  same  assurance?  As  Commons  declares,  "Now 
capitalism  is  to  blame  because  it  has  not  offered,  as  yet, 
to  labor  that  security  of  the  job  which  it  has  offered 
to  the  investors  in  the  security  of  their  investments.  Cap- 
italism is  threatened  because  it  has  not  furnished  the 
working  people  a  similar  security  to  that  which  it  has  fur- 
nished the  investors."^  Steady  employment,  industrial  in- 
surance and  a  living  wage  are  indispensable  to  the  security 
of  the  wage  worker.  ' '  This  need  for  security  is  fundamen- 
tal, and  almost  the  gravest  indictment  of  our  civilization  is 
that  the  mass  of  mankind  is  without  it."*  The  property 
right  to  security  must  be  matched  by  a  human  right  to  se- 
curity, for  otherwise  the  one-sided  insistence  upon  prop- 
erty rights  leads  the  community  into  deeper  and  deeper 
social  troubles. 

The  right  of  property  to  industrial  control. — Property 

carries  with  it  the  right  of  self-management.     The  owners 

of  capital  by  tradition  and  custom  have  the  right  to  control 

and  direct  the  business.     Labor  carries  no  such  inherent 

right.     The  labor  movement  is  thus  in  a  large  degree  a 

iR.  T.  Ely,  "Property  and  Contract,"  pp.   755-790. 

2  J.  R.  Commons,  "Trade  Unionism  and  Labor  Problems,"  p.  8. 

3/Mc7.,  p.  8. 

4R.  H.   Tawney,  "The   Acquisitive   Society,"  pp.   72-73. 


206  Capital 

determination  to  give  labor  the  same  right  as  that  now 
claimed  by  property.  A  large  number  of  employers  have 
already  voluntarily  undertaken  experiments  with  various 
forms  of  employee  representation  in  an  endeavor  to  work 
out  safe  and  sane  principles  and  plans  for  labor's  partici- 
pation in  certain  problems  of  management.  The  labor 
movement  is  a  flat  denial  of  the  exclusive  right  of  prop- 
erty to  hold  the  power  to  run  the  business.  The  laborer 
invests  his  life  in  the  business  and  feels  that  this  is  as 
good  a  claim  to  a  voice  in  the  control  of  the  business  as 
the  possession  of  a  certain  number  of  shares  of  stock. 
The  whole  force  of  the  labor  movement  is  a  demand  that 
the  right  of  industrial  control  must  be  shared. 

The  right  of  freedom  of  contract. — American  courts  have 
usually  interpreted  contract  rights  as  property  rights,  be- 
cause private  property  is  commonly  acquired  through  con- 
tract.^ The  common  view  is  that  freedom  of  contract  is  a 
province  wherein  the  individual  is  to  be  let  alone.  "His 
right  to  contract  freely  is  to  yield  only  to  the  safety, 
health,  or  moral  welfare  of  the  public. ' '  ^  But  in  the  eyes 
of  property-owners,  the  fewer  such  restraints  the  better. 
The  maximum  of  individual  freedom  of  contract  and  the 
minimum  of  social  restraint  are  taken  as  the  accepted  ideal. 
This  right  of  freedom  of  contract  is  so  firmly  entrenched 
in  judicial  tradition  and  in  legal  statute  that  virtually  all 
social  legislation  has  to  run  a  gauntlet  of  the  courts  before 
it  can  win  a  status  of  legality.  Such  social  legislation  is 
frequently  held  up  for  from  10  to  20  years  because  at  first 
shock  it  limits  freedom  of  contract.  At  the  present  time 
a  State  is  unable  to  pass  a  law  protecting  a  workman,  who 
desires  to  join  a  union,  from  discrimination  at  the  hands  of 
his  employer.  The  law  is  declared  by  the  court  to  impair 
the  freedom  of  contract  of  the  employer.  This  guarantee 
of  freedom  of  contract  is  also  a  guarantee  of  inequalities 

iR.  T.  Ely,  "Property  and  Contract."  pp.  53-54. 

2  See  Roscoe  Pound,  "Liberty  of  Contract,"  Yale  Law  Journal, 
Vol.  XVIII,  454-87.  Also  see  F.  J.  Goodnow,  "Social  Reform  and  the 
Constitution,"  Chap.  XXXIII,  and  T.  R.  Powell,  "Collective  Bargain- 
ing  before  the  Supreme  Court,"  Political  Science  Quarterly,  pp, 
396-429. 


Capital  207 

of  fortune.  The  United  States  Supreme  Court  asserts, 
' '  Wherever  the  right  of  private  property  exists,  there  must 
and  will  be  inequalities  of  fortune."  It  is  "impossible  to 
uphold  freedom  of  contract  and  the  right  of  private  prop- 
erty without  at  the  same  time  recognizing  as  legitimate 
those  inequalities  of  fortune  that  are  the  necessary  result 
of  the  exercise  of  those  rights."  In  other  words  the  in- 
equalities of  wealth  are  woven  into  the  institution  of  prop- 
erty, and  are  inseparable  from  it. 

The  equal  right  to  freedom  of  contract  means  the  equal 
right  to  be  let  alone  by  public  authority.  The  insistence 
upon  the  individualistic  exercise  of  the  right  has  led  to  a 
serious  complication  since  the  development  of  great  organi- 
zations of  labor  and  capital.  A  contract  between  an  in- 
dividual immigrant  worker  and  the  United  States  Steel 
Corporation  with  its  scores  of  subsidiary  companies  and  a 
property  value  of  upwards  of  $2,000,000,000,  was  not  fore- 
seen by  the  framers  of  the  constitutional  guarantees  of 
freedom  of  contract.  Such  a  contract  can  scarcely  be  con- 
ceived as  one  entered  into  between  equals.  Before  the  law, 
the  corporation  is  an  individual  person,  but  in  social  and 
industrial  fact,  it  is  a  colossal  aggregation  with  many  times 
the  bargaining  power  of  any  individual  laborer.  The  sig- 
nificance of  the  labor  demand  for  collective  bargaining  is 
that  the  labor  group  desires  to  wipe  out  this  actual  in- 
equality of  bargaining  power,  and  make  possible  a  labor 
contract  between  equal  groups.  Group  freedom  of  contract 
is  quite  different  in  principle  and  effect  from  individual- 
istic freedom  of  contract  and  the  form  in  which  society 
will  accept  group  freedom  of  contract  remains  to  be  deter- 
mined. Group  freedom  of  contract  is  not  guaranteed  by  the 
law  of  the  land  as  at  present  interpreted  by  the  courts. 
This  matter  is  the  center  of  a  huge  amount  of  bitter  dis- 
pute between  employers  and  employees,  and  is  one  of  the 
most  dynamic  spots  in  the  whole  institution  of  property 
rights.  ^ 

iR.  T.  Ely,  "Property  and  Contract,"  pp.  561-732.  See  also 
Sections  I,  II,  III  and  VI  of  Orth's  "Relation  of  Government  to 
Property." 


208  Capital 

The  bundle  of  rights,  therefore,  which  enters  into  the 
property  institution,  is  faced  to-day  with  a  number  of 
severe  challenges.  The  paramount  traits  of  the  social 
forces  in  regard  to  property  may  be  summed  up  under 
two  headings :  first,  that  property  rights  must  be  balanced 
by  property  duties  and  responsibilities;  and  second,  that 
group  rights  and  social  needs  shall  take  precedence  over 
purely  individualistic  rights  wherever  the  two  conflict.  At 
these  two  points  the  institution  of  property  is  in  process  of 
a  great  institutional  evolution,  and  the  transformation  in- 
volved has  social  and  economic  consequences  of  the  great- 
est magnitude. 

The  foregoing  discussion  has  been  directed  to  the 
psychological  and  legal  aspects  of  the  institution  of  prop- 
erty ownership.  The  following  discussion  is  directed  to  the 
structural  phase,  and  concerns  itself  with  the  corporate 
form  of  ownership,  since  the  corporate  form  of  ownership  is 
the  main  one  in  the  present  economic  system. 

Ownership  as  a  Corporate  Phenomenon 

Ownership  through  bonds  and  stocks  has  largely  dis- 
placed the  old  personal  direct  ownership  of  property  and 
has  become  the  typical  form  of  ownership  in  modern  organ- 
ized industry.  This  evolution  in  ownership  was  indispen- 
sable to  the  development  of  modern  production,  commerce 
and  finance.  Without  the  corporate  form  of  ownership  it 
is  inconceivable  that  the  modern  economic  system  could 
have  been  constructed.  ''Although  merely  an  immaterial 
form,  it  has  nevertheless  wielded  an  economic  and  social 
influence  greater  than  any  other  purely  conceptual  entity 
of  the  last  century.  The  contribution  of  the  corporation 
to  the  evolution  of  the  form  of  modern  industry  has  been 
no  less  potent  than  that  of  machinery  to  its  technique."  ^ 

Corporation  methods  allow  for  a  scattering  of  ownership 
with  a  concentration  of  control.  The  scattering  of  owner- 
ship is  carried  to  remarkable  lengths.  In  a  typical  large 
scale    enterprise,   the   owners   of   securities   are   scattered 

1  A.  Dewing,  "The  Financial  Policy  of  Corporations,"  pp.  x-xi. 


Capital  209 

throughout  most  of  the  States  of  the  Union,  and  through  a 
number  of  foreign  countries.  People  in  Brazil,  Japan, 
California  and  New  York  are  owners  of  the  securities  of  the 
typical  large  corporation  of  Pennsylvania  or  Ohio.  Men 
and  women,  wage  workers  and  farmers,  savings  banks  and 
insurance  companies,  multi-millionaire  estates  and  corpo- 
ration executives,  lawyers  and  doctors,  all  and  severally  own 
a  few  or  a  great  many  shares  of  securities,  and  this  grand 
miscellany  in  its  totality  is  the  ownership  of  the  corporate 
property  and  undertaking.  At  the  same  time,  the  execu- 
tive control  and  direction  of  the  corporate  property  is  high- 
ly concentrated.  A  controlling  amount  is  owned  by  special- 
ly interested  parties  and  the  votes  of  the  remaining  security 
holders  are  merely  nominal  votes.  These  major  interests 
manage  to  secure  a  satisfactory  Board  of  Directors,  this 
Board  in  turn  giving  over  the  administrative  tasks  of  the 
business  to  appointed  executives.  This  highly  concen- 
trated control  enables  men  of  high  initiative  and  powerful 
instincts  of  acquisitiveness,  achievement,  domination  or 
rivalry  to  have  at  their  disposal  the  accumulated  savings 
of  masses  of  people. 

In  1917,  there  were  345,047  corporations  listed  on  the 
records  of  the  Bureau  of  Internal  Revenue,  representing 
a  total  capitalization  of  about  one  hundred  billion  dollars, 
approximately  one-third  bonds  and  two-thirds  stocks. 
Bonds  appear  in  a  variety  of  forms,  but  have  one  basic 
principle  in  common,  namely,  they  are  secured  by  a  mort- 
gage on  definite  property  or  have  prior  claims  on  the  gen- 
eral assets  and  credit  of  the  corporation.  Backed  by  such 
a  security,  the  bond  is  the  corporation's  promise  to  pay  the 
investor  interest  on  a  certain  sum  of  money  for  a  stated 
period  of  time,  at  the  end  of  which  time  the  corporation 
promises  to  pay  back  the  sum  originally  borrowed.  The 
stockholders  have  a  right  to  the  income  or  property  of  the 
corporation  only  after  the  claims  of  bondholders  are  sat- 
isfied. As  a  rule  the  security  behind  stocks  is  secondary 
and  inferior,  but  the  rate  of  income  is  commonly  higher. 
People  w^ho  invest  in  bonds  are  usually  more  interested 
in  the  safety  of  their  money  than  in  high  income ;  whereas 


210  Capital 

people  who  invest  in  stocks  are  willing  to  sacrifice  some- 
thing of  safety  for  the  sake  of  securing  large  income. 

The  corporate  form  of  ownership  facilitates  the  exer- 
cise of  the  basic  property  rights. — The  right  to  acquire 
property  is  made  easy  of  exercise  for  anybody  who  is  able 
and  willing  to  save  money.  Bonds  run  in  denominations 
from  $50  to  $1000  and  stocks  from  $5  to  $100  par  value. 
Partial  payment  plans  enable  the  investor  to  buy  stock,  if 
he  chooses,  in  essentially  the  same  way  that  he  may  buy 
furniture, — on  the  installment  plan.  Savings  banks,  in- 
vestment banks,  bond  houses,  stock  exchanges,  underwrit- 
ing syndicates,  all  provide  a  ready  opportunity  for  invest- 
ment for  both  large  and  small  sums.  The  wool  grower  in 
Australia  can  acquire  the  property  of  the  Pennsylvania 
Railroad  and  the  wage  worker  of  Pittsburgh  can  acquire 
the  property  of  English  iron  works.  The  farmer  in  Kan- 
sas can  acquire  the  property  of  Pennsylvania  coal  mines, 
and  the  bank  president  of  New  York  City  can  acquire  the 
property  of  Brazilian  coffee  companies.  If  the  would-be 
investor  has  the  money  wherewith  to  buy,  he  can  have 
bonds  or  stocks,  and  no  questions  asked.  The  investment 
market  is  organized  to  attract  investors,  and  corporations 
vie  with  each  other  to  draw  the  funds  of  investors  toward 
their  securities. 

The  right  to  income  is  likewise  facilitated  by  the  corpo- 
rate form  of  ownership.  The  bondholder  is  entitled  to  his 
interest  and  the  stockholder  to  his  dividends.  The  assur- 
ance of  income  stands  as  one  of  the  primary  inducements 
to  investment.  Over  160,000  individual  stockholders  draw 
income  annually  from  the  United  States  Steel  Corpora- 
tion, and  about  140,000  draw  income  from  the  Pennsyl- 
vania Railroad.  Income  on  bonds  in  the  form  of  in- 
terest must  be  paid  at  all  costs;  dividends  on  preferred 
stock  must  be  paid  unless  the  financial  status  of  the  com- 
pany makes  payment  unwise;  dividends  on  common  stock 
are  paid  only  in  case  there  is  enough  left  over  to  make  the 
reward  possible.  The  right  to  income  is  not  absolute,  ex- 
cept in  regard  to  bonds.  Dividends  involve  more  or  less 
of  the  risks  attached  to  profits.    But  without  the  assurance 


Capital  211 

of  immediate  or  ultimate  dividends  money  will  neither  be 
put  in  nor  kept  in  stocks.  Common  stocks  carry  the  possi- 
bility of  unlimited  income,  and  many  of  the  great  fortunes 
owe  their  success  in  large  measure  to  skill  and  luck  in 
managing  the  risks  of  the  common  stock  adventures.  To  a 
considerable  extent,  moreover,  these  investments  are  not 
so  much  an  investment  in  property  as  in  earning  power. 
Good  will,  intangible  assets,  earning  capacity,  etc.,  are  com- 
mon factors  in  stock  issues,  and  mean  simply  that  the  man 
who  buys  them  buys  the  right  to  an  income  in  the  future. 
If  the  buyer  went  to  the  establishment  of  the  corporation 
and  asked  to  see  his  property,  no  one  could  show  it  to  him. 
He  would  not  own  machines,  or  buildings,  or  raw  or  fin- 
ished material.  He  would  own  earning  capacity,  an  intan- 
gible concept,  but  nevertheless  a  reality  on  dividend  day. 
But  as  a  matter  of  fact  the  average  owner  of  stock  would 
never  think  of  going  to  the  corporation's  plant  and  asking 
to  see  his  property.  He  bought  the  right  to  an  income 
and  cares  little  or  nothing  where  it  comes  from.  He  bought 
dividends,  not  tangible  property.  So  long  as  dividends  are 
forthcoming,  his  purchase  of  the  earning  power  justifies 
itself.  The  stock  purchaser  may  anticipate,  at  the  same 
time,  that  a  rise  will  occur  in  the  market  value  of  his  stock. 
If  he  can,  by  holding  it,  sell  for  more  than  he  paid,  the  dif- 
ference represents  gain. 

The  right  to  security  is  safeguarded  by  the  courts  in  ap- 
plying the  State  and  Federal  Law  to  corporate  property. 
A  corporation  is  a  legal  person,  and  no  person  shall  be  de- 
prived of  property  without  due  process  of  law.  Banks, 
Bond  Houses,  and  the  Stock  Exchanges  set  out  to  take 
reasonable  precautions  against  wild-cat  speculations,  and 
endeavor  to  protect  their  customers  from  fraudulent  stock 
flotations.  The  bonded  property  of  the  country  is  power- 
fully entrenched  behind  legal  barriers,  and  property  once 
acquired  by  the  corporation,  whether  by  fair  means  or  un- 
fair, is  entitled  to  full  protection  by  the  law.  The  right  to 
security  has  a  deep  psychological  basis.  Temperaments 
among  buyers  of  securities  vary  immensely.  Some  buyers 
want  their  principal  to  be  absolutely  safe,  and  for  buyers 


212'  Capital 

of  their  moods,  bonds  of  one  sort  and  another  are  avail- 
able. Others  are  not  extreme  sticklers  for  safety,  but  with 
a  moderate  anxiety  for  safety,  they  combine  an  instinc- 
tive fascination  for  higher  income.  For  these  groups,  pre- 
ferred stocks  are  the  main  forms  of  securities.  Others  of  a 
speculative  bent  are  willing  to  take  a  fairly  large  risk  on 
common  stock  in  the  hope  that  the  dividend  returns  will 
be  extraordinary.  The  range  from  safety  to  risk  covers  all 
degrees  and  variations  and  offers  stocks  and  bonds  to  satisfy 
the  temperaments,  moods  or  whims  of  all  comers.  In  these 
forms,  corporate  securities  enjoy  the  protection  of  limited 
liability  ^ — that  is,  in  case  of  the  financial  failure  of  the 
corporation,  each  shareholder  is  liable  only  to  the  amount 
of  his  shares.  Moreover,  the  entire  status  of  the  stock- 
holder is  described  in  a  charter  of  incorporation  granted 
by  the  State,  and  the  position  of  the  stockholder  is  thereby 
definitely  recorded  in  a  legal  document.^  The  net  out- 
come of  the  corporate  system  is  to  give  the  holder  of  stocks 
and  bonds  a  fairly  high  degree  of  safety  for  his  principal 
and  a  maximum  assurance  of  uninterrupted  interest  or 
dividends. 

The  right  of  self-management  is  obtained  in  the  cor- 
porate system  in  a  way  which  makes  for  high  concentra- 
tion of  control.  Corporation  management  is  founded  upon 
the  inertia  of  the  average  stockholder.  Theoretically,  each 
shareholder  has  the  right  to  vote  for  the  directors,  but 
in  actual  practice,  the  shareholders  are  a  scattered,  dis- 
united mass,  and  the  majority  of  them  leave  the  effort 
of  choosing  directors  and  running  the  business  to  some- 
one else.  *'It  is  a  well-known  fact  of  American  finance 
that,  if  the  majority  shares  are  scattered,  a  rather  small 
minority  of  the  stock  held  by  an  individual  shareholder, 
or  a  little  group  of  shareholders  working  together,  can  con- 
trol the  corporation  almost  as  surely  as  if  they  held  an 
absolute  majority  of  all  the  stock  outstanding.  .  .  .  The 
more  shareholders  there  are  in  a  particular  corporation  the 

iLyon,  "Capitalization,"  pp.  9-12. 

2  L.  H.  Haney,  "Business  Organization  and  Combination,"  p.  109, 
Chapters  VI-VII, 


Capital  213 

fewer  shares  can  control.  .  .  .  From  a  quarter  to  a  third  of 
the  shares  of  an  American  corporation  will  usually  assure 
control."^  The  right  of  owners  to  self -management  of 
property  amounts  then  in  actual  practice  to  throwing  the 
management  of  the  corporation  into  the  hands  of  active 
minority  interests.  By  the  proper  organization  of  holding 
companies,  interlocking  directorates,  and  other  devices,  the 
owners  of  a  few  million  dollars'  worth  of  stock  can  control 
and  direct  hundreds  of  millions  of  dollars  of  other  peoples' 
stock.  This  situation  is  enhanced  by  virtue  of  the  fact 
that  the  bondholder  forfeits  any  active  voice  in  the  man- 
agement of  the  business.  He  becomes  a  creditor  of  the 
corporation  and  his  money  is  treated  as  a  loan.  He  has 
no  vote  for  the  directors  of  the  business,  and  can  assert  his 
voice  only  in  case  the  insolvency  of  the  corporation  is 
threatened  or  actually  reached.  In  the  railroads,  bonds 
amount  to  considerably  more  than  half  of  the  total  capi- 
talization, and  hence  it  follows  that  the  majority  hold- 
ers of  the  property  of  railroad  corporations  have  no  active 
voice  in  railroad  management.^  In  addition  to  these  ar- 
rangements, modern  corporation  policy  tends  to  give  to  the 
common  stock  owners  the  exclusive  right  to  vote  for  direc- 
tors. The  preferred  shareholders  thereby  surrender  the 
right  of  franchise  and  occupy  essentially  the  position  of  the 
bondholders  so  far  as  voting  is  concerned;  and  the  entire 
direction  of  the  corporation  is  given  over  to  the  common 
stock  interests.  When  it  is  remembered  that  the  common 
stock  represents,  primarily,  intangible  assets,  good  will, 
earning  capacity,  but  not  tangible  property,  it  is  obvious 
that  this  arrangement  serves  to  place  the  real  power  of 
management  of  the  whole  corporate  property  in  the  hands 
of  those  who  own  good  will.  This  arrangement  has  become 
so  widespread  that  a  recent  author  declares,  "Practically 
without  exception,  the  common  stockholders  manage  the 
business  and  receive  the  largest  share  in  the  profits."'^ 
Consequently  the   right  of  self-management   exists  for 

iLyon,  "Capitalization,"  pp.  9-15. 

2  Dewing,  "Tlie  Financial  Policy  of  Corporations,"  pp.  34-134. 

3  Jordan,  "Investments,"  p.  14. 


214  Capital 

the  great  mass  of  corporate  owners  only  on  paper ;  in  reality 
it  is  a  dead  letter.  The  scattered  security  owners  are  ab- 
sentee owners,  and  know  nothing  and  are  expected  to  know 
nothing  of  the  actual  working  of  the  corporation.  They 
own  a  paper  certificate,  and  receive  dividend  or  interest 
checks,  and  care  not  a  whit  whether  they  ever  see  the 
corporation  so  long  as  the  income  is  forthcoming.  Then, 
too,  the  owner  may  not  hold  the  security  for  any  con- 
siderable period  of  time.  In  a  single  year  the  common 
stock  of  the  United  States  Steel  Corporation  changed 
hands  so  rapidly  that  nearly  32,000,000  shares  were  bought 
and  sold.  Some  buyers  hold  their  securities  for  years, 
others  for  weeks  or  days  or  mmutes.  It  is  all  the  same  to 
the  corporation,  for  its  policies  go  on  without  regard  to 
how  fast  the  mass  of  scattered  shares  change  hands.  The 
instincts  of  ownership  in  this  arrangement  are  quite  dif- 
ferent from  the  instincts  prevailing  in  the  farmer  who 
may  both  own  and  till  his  land,  or  the  small  shopkeeper 
who  is  both  owner  and  manager  of  his  establishment. 
Corporate  organization  has  divorced  management  from  the 
bulk  of  ownership. 

Ownership  becomes  under  these  conditions  an  extremely 
impersonal  affair.  It  becomes  mainly  the  right  to  tuck 
savings  away  where  they  will  be  fairly  safe,  where  some 
scantily  known  interests  may  manage  them,  and  where  they 
will  draw  out  of  the  business  certain  pay  checks  every 
three  to  six  months.  The  duties  of  ownership  are  faint. 
The  security  holder  acknowledges  no  responsibility  for 
profiteering,  monopoly  discriminations,  unfair  competition, 
long  hours,  low  wages,  bad  labor  conditions,  or  unsocial 
business  policies.  If  by  any  chance  he  does  become  inter- 
ested in  these  phases  of  corporation  activity,  he  may  wash 
his  hands  by  selling  out,  and  allowing  some  other  party  to 
draw  what  seemed  to  him  the  tainted  dividends,  or  he 
may  vote  for  a  new  President  or  Governor  who  promises 
new  laws  regulating  bad  business  practices  out  of  corpora- 
tions. But  he  would  practically  never  undertake  to  whip 
up  an  interest  in  the  issue  among  the  scattered  horde  of 
shareholders.    To  the  security  owner,  most  of  the  people  in- 


Capital  215 

volved  in  the  actual  business  are  unknown  quantities.  The 
managers  of  the  various  phases  of  the  business,  the  labor- 
ers in  the  factory  or  the  mine,  the  salesmen,  the  engineers, 
the  accountants,  the  vice-presidents, — all  of  these  are  stran- 
gers to  the  shareholders.  There  is  no  personal  touch  be- 
tween workers  and  owners,  no  common  understanding,  no 
mutual  contact.^  It  is  an  impersonal  relationship,  and 
necessarily  so,  because  of  the  motives  which  lead  men  to 
put  their  money  in  corporate  securities  and  because  of  their 
inertia  in  leaving  to  minority  interests  the  management  of 
the  property.^ 

The  entire  corporate  system  is  the  primary  structural  part 
of  the  modern  institution  of  property.  Its  results  are  both 
good  and  bad.  The  unsocial  policies  of  many  corporations, 
the  frequent  exaltation  of  profits  above  considerations  of 
use  and  service,  the  manipulations  by  inside  interests,  and 
the  apathy  of  the  real  owners  are  the  natural  outcome  of 
the  present  form  of  the  corporate  organization.  The  in- 
stitution works  out  to  such  ends.  On  the  other  hand  the 
corporate  type  has  accomplished  the  efficiency  of  the  pres- 
ent industrial  system.  It  has  stimulated  initiative,  ambi- 
tion, and  aggressiveness ;  and  has  made  it  possible  for  lead- 
ers of  great  ability  to  work  in  industry  with  the  savings 
of  millions  of  people.  It  has  applied  science  and  invention 
to  the  services  of  production,  and  has  made  the  economic 
order  what  it  is  to-day.  These  items  of  description  of  the 
methods  and  processes  of  the  corporate  institution  present 
a  picture  of  the  corporation  in  action.  This  picture  will 
serve  as  the  basis  for  a  discussion  of  fundamental  business 
problems  in  later  chapters. 

The  fifth  classification,  namely,  the  distribution  of  the 
national  income  between  wages,  rent,  interest  and  profit,  is 
explained  through  the  principles  of  minimum  and  surplus. 
This  explanation  views  the  national  income  as  a  national 
stream,  a  fractional  part  of  which  is  diverted  into  each  of 
the  channels  known  as  wages,  rent,  interest  and  profit. 
The  broad  principles  of  minimum  and  surplus  give  a  rea- 

1  See  Tlobhouse,  "Property,"  pp.  22-2.3. 

2  On  this  general  subject,  see  also  pp.  244-253. 


216  Capital 

sonably  serviceable  explanation  of  the  size  of  the  fraction 
which  goes  for  each  of  these  purposes. 

The  Principle  of  Minimum 

For  the  maintenance  of  the  national  economic  organi- 
zation, it  is  necessary  that  labor,  land  and  capital  be  com- 
bined in  right  proportions.  A  co-ordination  of  these 
elements  is  necessary  in  order  to  secure  a  balanced  in- 
dustrial system.  An  excess  of  land  in  proportion  to  labor 
employed  would  bring  inefficiency  and  waste ;  a  shortage  of 
capital  in  proportion  to  labor  would  diminish  productive 
efficiency;  a  shortage  of  any  element  or  an  excess  of  any 
one  element  brings  waste  and  loss.  The  industrial  system 
works  well  just  to  the  extent  that  the  primary  economic 
elements  are  brought  together  in  the  most  advantageous 
relative  amounts.  The  income  assigned  to  each  element 
must,  at  the  very  least,  be  enough  to  draw  out  enough  of 
that  element  to  suffice  for  the  balancing  of  the  industrial 
system.  The  minimum  share  of  the  total  national  dividend 
given  to  labor  must  be  enough  to  draw  an  adequate  supply 
of  efficient  labor  into  productive  employment.  The  mini- 
mum share  given  to  owners  of  land  must  be  enough  to 
draw  an  adequate  supply  of  productive  agricultural  soil 
and  of  improved  land  sites  for  all  economic  purposes.  The 
minimum  share  given  to  capital  owners  must  be  enough  to 
draw  an  adequate  supply  of  capital  in  the  form  of  mechan- 
ical equipment,  buildings,  transportation  machinery  and 
the  like.  The  minimum  share  given  to  each  element  must 
be  enough  to  bring  an  adequate  supply  of  that  element  into 
active  economic  use.  An  adequate  supply  is  a  supply  that 
balances  the  economic  system  in  terms  of  efficiency,  pro- 
ductivity and  greatest  returns. 

But  the  minimum  return  is  not  uniform  for  all  laborers, 
all  land  owners,  all  capital  owners.  The  minimum  wage  re- 
turn varies  with  different  grades  and  classes  of  labor, 
depending  upon  gradations  in  standards  of  living,  in  effi- 
ciency of  workers,  in  training  and  intelligence,  and  in  at- 
tractiveness of  work,  severity  of  work,  and  type  of  work. 


Capital  217 

In  each  grade  of  workers,  if  a  cut  in  wages  is  made  below 
the  minimum  level  for  that  grade,  some  workers  will  quit 
the  industry,  whereas  others  will  stay  on  reluctantly  at  the 
low  figure.  The  quitting  of  a  number  of  the  workers  will 
deplete  the  labor  force  in  that  industry,  and  the  shortage 
of  labor  will  unbalance  the  industrial  organization.  In 
other  words,  a  cut  of  wages  below  the  minimum  level  for 
each  grade  and  type  of  work  will  not  cause  all  workers 
to  drop  out  of  the  industry  in  unison, — unless  of  course 
they  deal  with  the  wage  issue  as  a  union  and  quit  by  strik- 
ing,— but  will  drive  out  first  a  few  of  the  workers  who  are 
unable  to  support  their  families  at  the  new  figure,  or  Avho 
can  find  better  wages  at  other  lines  of  work,  or  who  for  any 
reason  are  too  dissatisfied  with  the  work  to  remain  in  that 
employment.  There  is  a  point  beyond  which  wages  can- 
not fall  without  reducing  the  supply  of  labor  so  greatly  as 
to  destroy  the  balance  of  the  industrial  organization. 

The  principle  of  minimum  applies  in  a  similar  way  to 
land  and  capital.  A  reduction  of  the  share  of  national 
income  apportioned  to  land  owners  below  a  certain  mini- 
mum point  will  cause  land  owners  to  withdraw  their  land 
from  use  and  to  abstain  from  making  improvements.  The 
first  degree  of  reduction  below  the  minimum  will  not  per- 
suade all  land  owners  to  follow  this  course  of  action  at  one 
and  the  same  time,  but  it  will  persuade  first  a  group  of 
land  owners  whose  land  is  so  poor  in  quality  or  so  un- 
favorable in  location  or  so  high  in  cost  of  operation  that 
they  can  no  longer  afford  to  put  their  land  in  use.  The 
supply  of  land  will  become  inadequate  and  the  balance  of 
the  industrial  system  will  be  destroyed.  Likewise,  a  cut 
in  interest  or  dividends  below  a  certain  minimum  will 
persuade  a  number  of  property  owners  to  withdraw  from 
industrial  activity.  Their  withdrawal  will  cause  a  famine 
of  capital  and  the  industrial  system  will  be  thrown  out  of 
joint.  In  brief,  there  are  certain  minimum  terms  of  reward 
which  are  imperative  if  enough  labor,  land  and  capital 
are  to  be  brought  into  economic  use.  Any  drop  of  income 
below  the  minimum  will  drive  out  the  workers,  land  own- 
ers, and  capital  owners  who  are  most  easily  persuaded  to 


218  Capital 

go,  and  will  thereby  cause  a  dearth  in  the  supply  of  that 
particular  element. 

This  principle  of  the  minimum  applies  equally  to  each 
separate  line  of  industry  and  commerce  within  the  nation, 
and  to  the  economic  organization  of  the  whole  nation  as 
a  unit.  If  wages  of  labor  in  steel  mills  are  reduced  below 
a  certain  point,  a  defection  of  workers  will  begin  in  the 
steel  mills,  and  the  men  who  have  quit  the  steel  industry  will 
endeavor  to  enter  other  lines  of  industry  where  wages 
are  above  the  minimum  acceptable  level.  If  the  return  on 
land  used  in  house  construction  is  below  a  requisite  mini- 
mum, land  owners  will  refuse  to  build,  or  will  persuade 
factories  to  use  the  land  instead  of  house  contractors.  If 
interest  and  profit  in  the  railroad  industry  fall  below  a 
minimum,  people  with  money  to  lend  or  invest  will  seek 
to  place  it  in  another  line  of  industry  where  the  return  is 
acceptable.  Hence  the  principle  of  the  minimum  tends 
to  compel  a  constant  adjustment  of  the  return  for  land, 
labor  and  capital  in  each  branch  of  industry  on  the  basis 
of  the  minimum  of  return  necessary  to  retain  in  that 
branch  of  industry  an  adequate  and  balancing  supply  of 
each  element. 

But  suppose  aU  branches  of  industry  reduced  the  income 
of  labor,  land  owners  or  capital  owners  at  one  and  the 
same  time.  In  that  case,  the  disgruntled  laborer,  of  course, 
could  not  turn  from  a  low  wage  industry  to  a  high  wage 
industry,  because  there  would  have  been  a  simultaneous, 
corresponding  reduction  in  all  industrial  fields.  Or  sup- 
pose interest,  rent  or  profits  fell  below  the  commonly 
set  minimum  for  all  fields  of  economic  activity.  The  re- 
sult would  be  first  of  all  to  drive  labor  or  capital  out  of 
the  country.  Emigration  of  labor  would  occur  and  capital 
would  seek  investment  in  foreign  countries.  Land  could 
not  be  exported,  but  the  upkeep  of  land  would  not  pay,  and 
it  would  rapidly  develop  a  run-down  condition.  In  short, 
a  certain  minimum  level  of  return  for  each  element  of  the 
economic  organization  is  imperative  if  it  is  to  maintain  a 
proper  co-ordination  and  balance. 

It  is  well  to  point  out  that  although  land  and  capital 


Capital  219 

differ  in  the  respect  that  land  is  given  by  nature  and  capital 
is  produced  by  the  economic  handiwork  of  man,  neverthe- 
less the  two  are  identical  in  fundamental  respects.  Practi- 
cally all  land  in  use  at  present  has  had  improvements  made 
upon  it  so  that  its  original  qualities  and  values  as  given 
by  nature  have  been  augmented  and  improved  upon  by  the 
economic  handiwork  of  man.  It  is  estimated  that  fully  40 
per  cent,  of  land  values  are  due  to  improvements  on  real 
estate.  Because  of  this  fact,  the  principles  of  minimum 
and  surplus  apply  in  substantially  identical  ways  to  both 
land  and  capital. 

The  principle  of  surplus  rests  upon  the  gradations  in 
the  expenses  of  laborers,  of  land  owners,  and  of  capitalists. 
Millions  of  laborers  live  at  the  poverty  line,  millions  of 
others  at  the  minimum  standard  of  living  line,  another 
group  at  the  minimum  of  comfort  line,  and  another  group 
above  the  extravagance  line.  In  each  successive  group  are 
laborers  whose  income,  in  reference  to  the  preceding  group, 
gives  them  a  surplus  above  the  income  of  the  preceding 
group.  Hence  laborers  receiving  a  surplus  above  the  liv- 
ing wage  level  enter  the  group  living  on  the  comfort  level ; 
and  a  surplus  above  the  comfort  level  puts  laborers  onto 
the  extravagance  or  prosperity  level.  Because  an  indi- 
vidual's expenses  are  low,  or  his  bargaining  power  through 
a  labor  union  is  great,  or  for  other  reasons,  his  wage  renders 
him  over  and  above  necessary  living  expense,  a  surplus. 
It  is  the  same  with  land  owners.  Some  land  entails  an  ex- 
traordinary high  cost  of  tillage  and  upkeep  so  that  rent 
is  barely  enough  to  meet  the  cost  of  maintaining  the  land 
for  productive  uses;  for  such  land,  there  is  no  surplus  in- 
come. It  is  on  the  margin  where  costs  equal  income.  But 
above  the  base  line  of  this  margin  exist  better  grades  of 
land,  soil  that  is  more  fertile,  building  sites  more  favor- 
ably situated;  real  estate  whose  cost  of  operation  and  use 
is  low  in  proportion  to  income.  For  such  land,  rent  sup- 
plies over  and  above  the  minimum  income  needed  to  meet 
costs,  a  surplus,  an  excess  gain  to  the  owners.  In  a  similar 
manner,  the  cost  of  operation  of  different  units  of  capital 
varies  widely.    Some  shops,  factories,  railroads  and  stores 


220  Capital 

can  scarcely  make  ends  meet;  they  are  at  the  margin 
where  costs  just  about  eat  up  income.  But  above  these 
base  line  business  concerns  are  all  sorts  of  gradations  of 
businesses  which  enjoy  advantages,  economies  and  efficien- 
cies such  that  their  costs  by  no  means  equal  their  income. 
Such  businesses  have  a  surplus  over  and  above  all  expenses, 
and  over  and  above  the  minimum  income  necessary  to  meet 
the  costs  of  those  low  grade  businesses  at  the  margin  whose 
costs  are  so  great  as  to  consume  income  entirely.  In  each 
of  the  elements  of  economic  organization  there  is  a  mini- 
mum payment  requisite  as  an  incentive  to  secure  an  ade- 
quate amount  of  that  element.  But  when  this  minimum 
is  paid,  there  are  great  numbers  of  workers,  of  land  owners 
and  of  capital  owners,  who,  because  of  superior  advantages, 
low  costs,  unusual  economies  and  efficiencies,  realize  a 
surplus  of  great  or  small  size. 

The  group  of  economic  concepts  involved  in  the  mini- 
mum and  surplus  are  fundamental  to  any  comprehensive 
interpretation  of  income  distribution.  Nothing  is  more  es- 
sential than  to  get  away  from  the  assumption  that  a  fixed 
uniformity  rigidly  prevails  in  all  units  of  labor,  land  and 
capital.  The  economic  facts  of  the  case  shatter  completely 
any  such  assumption.  The  actual  economic  conditions 
consist  of  gradations  and  levels  of  laborers,  landlords  and 
capitalists,  some  at  the  margin  of  existence,  and  above  them 
many  grades  and  levels  of  laborers,  landlords  and  capital- 
ists realizing  all  degrees  of  surplus. 

The  consuming  ambition  of  all  groups  is  to  win  as  large 
a  surplus  as  possible.  The  surplus  is  the  source  of  economic 
fortune,  fame  and  power.  In  it  is  wrapped  up  the  source 
of  satisfaction  for  great  instincts  seeking  expression  in 
economic  achievement.  Everywhere  men  match  their  wits 
in  a  stupendous  scramble  to  exact  the  lion's  share  of  the 
surplus  for  themselves.  In  every  branch  of  manufacture, 
transport,  agriculture,  finance,  mining  and  commerce,  all 
parties,  laborers,  land  owners,  and  capital  owners  are  en- 
deavoring to  raise  their  bargaining  power  to  the  maximum 
in  order  to  capture  the  greatest  possible  amount  of  the  sur- 
plus.    Different  parties  organize,  combine,  and  plan  for 


Capital  221 

the  purpose  of  attaining  the  strategy  and  power  necessary 
to  extract  the  greatest  amount  of  the  surplus. 

The  consequence  is  that  the  actual  shares  of  the  differ- 
ent parties  bear  no  fixed  ratio  in  all  industries,  or  in  all 
years  alike.  On  the  contrary  the  ratio  of  the  shares  of  income 
going  to  laborers,  landlords  and  capital  owners  the  country 
over  varies  from  year  to  year  and  from  industry  to  in- 
dustry. To  illustrate,  some  variations  in  the  distribution 
of  shares  of  income  in  the  national  industries  of  mining, 
manufacturing,  railroad  and  public  utility  corporations  for 
the  years  between  1913  and  1919  may  be  taken.  The  share 
of  wages  was  63.9  per  cent,  in  1913,  but  shrank  to  54.3 
per  cent,  in  1917  and  rose  to  70.2  per  cent,  in  1919.  More- 
over, in  1919,  "interest  and  dividends  together  absorbed 
hardly  more  than  half  of  the  share  of  the  product  that 
they  had  in  1913  and  1914."  These  figures  show  variations 
in  the  division  of  the  total  national  income  for  the  major 
industrial   departments   of  the   economic    organization.^ 

The  variations  in  the  ratio  of  division  as  between  differ- 
ent lines  of  industrial  pursuits  also  deserve  illustration. 
In  1916,  only  40.6  per  cent,  of  gross  railroad  revenues  went 
to  labor  in  the  form  of  wages;  in  1918,  54.06  per  cent,  went 
to  labor  and  in  1919  and  1920  the  percentage  was  still 
greater.  From  income  statistics  for  1917,  it  is  found  that 
for  railroads  the  great  mass  of  profit  is  less  than  10  per' 
cent,  on  invested  capital ;  that  for  banks,  the  great  mass  of 
income  falls  between  10  and  15  per  cent,  on  invested  capi- 
tal; that  for  manufacturing,  mining  and  mercantiling,  the 
main  portion  of  profit  ranges  from  30  to  50  per  cent,  on 
invested  capital ;  while  for  water  transportation,  the  bulk 
of  profits  was  from  75  to  100  per  cent,  of  invested  capital. 
The  variations  between  different  establishments  in  a  single 
branch  of  economic  life  are  well  illustrated  in  banking. 
Out  of  ten  large  New  York  City  banks  in  1919,  one  earned 
35.8  per  cent,  on  capital  and  surplus,  two  others  earned 
above  24  per  cent.,  five  earned  between  18  and  13  per  cent, 
and  two  earned  less  than  13  per  cent.  Such  variations 
would  not  only  be  found  among  banks  in  general  but  also 

1  See  David  Friday's  "Profits,  Wages  and  Prices,"  pp.  124-132. 


222  Capital 

among  the  establishments  within  any  other  line  of  economic 
activity.  The  conclusion  is  obvious  that  variation  rather 
than  uniformity  is  to  be  looked  for  in  the  division  of  shares 
of  income,  whether  for  all  economic  activity  over  a  period  of 
years,  or  for  groups  of  industries  in  any  one  year,  or  for 
individual  establishments  within  a  single  line  of  industry 
in  any  one  year.^ 

Personal  inequalities  of  income  and  ownership  were  com- 
prised in  the  sixth  and  seventh  classifications  of  wealth 
statistics.  Certain  obvious  causes  of  the  inequalities  of  for- 
tune have  already  been  pointed  out.  The  whole  concep- 
tion of  individualistic  property  rights  has  been  woven  into 
the  institution  of  property  in  ways  which  make  inequalities 
the  natural  outcome  and  the  corporate  structure  of  owner- 
ship provides  a  ready  mechanism  for  the  accumulation  of 
wealth  and  income.  But  there  are  other  factors  which  en- 
ter directly  into  the  inequalities,  and  the  whole  set  of  causes 
may  be  considered  now  in  two  fundamental  groups, — first, 
inequalities  due  to  unequal  abilities;  second,  inequalities 
due  to  unequal  privileges. 

Men  are  born  into  the  world  with  unequal  instinctive 
and  mental  equipment.  Some  are  dull,  unambitious,  and 
slow;  others  are  shrewd,  aggressive  and  quick.  Success  in 
acquiring  large  income  and  much  property  goes  to  those 
of  superior  ability,  and  the  successful  classes  are  usually 
thought  of  as  the  well-to-do  classes.  It  takes  brains  to  earn 
a  million  dollars.  The  wage-earner  at  the  other  end  of  the 
scale  has  limited  imagination,  ability,  initiative,  and  sa- 
gacity. He  is  poorly  educated,  and  in  the  day's  work  has 
ambition  ground  out  of  him.  Only  in  exceptional  instances 
do  there  appear  the  men  of  indomitable  instinctive  energy 
who  by  their  own  merit  force  their  way  from  nothing  to 
riches.  But  it  is  this  exceptional  man  whose  ability  is 
urgently  needed  for  the  smooth  working  of  the  economic 
organization  and  whose  genius  should  be  encouraged  and 
evoked  by  the  property  institution.    It  is  natural  that  when 

1  On  this  whole  matter  see  David  Friday's  "Prices,  Wagres  and 
Profits,"  Chapter  TTI,  and  Hugh  Dalton's  "The  Inequality  of 
Incomes,"  Chapter  X. 


Capital  223 

men  of  strikingly  unequal  native  ability  struggle  for  the 
same  prize,  the  man  of  superior  ability  should  win  out.  The 
freedom  and  rights  of  property  encourage  many  men  of 
superior  gifts  to  exert  their  strength  to  the  utmost.  The 
rewards  are  high  and  success  is  a  sure  claim  to  social  dis- 
tinction. 

A  feature  of  this  situation  which  is  not  often  contem- 
plated is  the  universally  accepted  conviction  that  the  ability 
of  a  wage  worker  can  never  be  great  enough  to  deserve 
more  than  three  or  four  thousand  dollars  a  year,  Superior 
endowment  as  a  machinist,  splendid  gifts  as  a  worker,  the 
finest  eye  and  most  skilled  hand  all  reach  their  limit  of 
deserved  reward,  usually  before  a  $2500  wage  is  reached, 
certainly  before  a  $5000  figure  is  reached.  No  matter  how 
great  his  ability  as  a  laborer,  he  cannot  actually  earn  be- 
yond certain  very  narrow  limits.  It  is  only  ability  as  a 
manager  or  director  or  property  owner  which  earns  un- 
limited returns.  This  social  maxim  has  become  so  axiomatic 
that  it  is  as  natural  as  the  air  we  breathe.  We  think  noth- 
ing of  it.  The  financial  reward  of  a  million  dollar  invest- 
ment is  not  infrequently  greater  than  the  financial  reward 
of  a  score  of  the  most  competent  skilled  laborers.  The  prop- 
erty investment  of  that  amount  is  entitled  to  earn  any- 
where from  4  per  cent,  to  4000  per  cent.,  but  the  finest 
ability  of  a  score  of  laborers  commands  no  such  unlimited 
right  of  return.  This  idea  is  simply  a  matter  of  fact 
principle  which  everyone  takes  for  granted,  and  it  obvi- 
ously plays  a  part  in  the  inequalities  of  wealth  which  pre- 
vail everywhere.  Even  a  second  rate  managerial  ability  is 
usually  conceived  as  deserving  a  higher  reward  than  the 
best  type  of  manual  dexterity  or  workmanship. 

Unskilled  Ability  Earns  Less  Income  than  Skilled 

The  ability  of  women  workers  earns  less  than  that  of 
men.  "It  is  an  economic  advantage  to  be  born  a  boy 
rather  than  a  girl. ' '  ^  Ability  exercised  in  certain  occu- 
pations brings  higher  returns  than  ability  exercised  in 
others.  There  are  immense  variations  and  many  excep- 
1  Cannan,  "Wealth,"  p.  202. 


224  Capital 

tions,  but  with  the  general  run  of  incomes,  high  ability  in- 
fluences income  upwards,  whereas  low  ability  influences 
income  downwards. 

These  principles  apply  of  course  primarily  to  income 
from  work  rather  than  to  income  from  owning.  Income 
from  investment  need  not  be  accompanied  by  any  substan- 
tial exercise  of  ability  or  effort  on  the  part  of  the  owner. 
Inequalities  of  ability  are  of  importance  chiefly  in  their 
effects  upon  incomes  for  work  and  effort.  Clever  manage- 
ment of  property  will  make  it  accumulate  more  rapidly. 
But  such  managers  can  be  hired  at  a  salary,  and  their 
salaries  are  a  truer  measure  of  ability  than  is  the  property 
income  which  goes  to  the  owner. 

It  should  be  noted  too  that  these  inequalities  of  ability 
tend  to  perpetuate  themselves.  The  children  of  the  un- 
skilled laborer  inherit  a  family  and  social  environment  which 
tends  to  hold  them  to  that  level.  ' '  There  are  no  absolute- 
ly insurmountable  barriers  preventing  those  who  are  born 
into  poor  surroundings  from  forcing  their  way  into  the 
best  paid  professions  if  they  have  exceptional  ability  and 
grit,  and  there  is  nothing  to  prevent  exceptionally  inca- 
pable persons  born  in  good  surroundings  from  falling  into 
the  lowest  class  of  workers.  But  all  the  same,  it  is,  as  every 
one  knows,  a  great  advantage  to  the  ordinary  person  in 
the  matter  of  earning  his  living,  to  be  the  child  of  fairly 
well-to-do  parents,  and  an  enormous  disadvantage  to  be 
the  child  of  parents  belonging  to  the  poorest  class. ' '  ^ 

There  is  a  great  reserve  fund  of  ability  in  the  lower- 
paid  classes  which  is  never  developed.  Lack  of  encourage- 
ment, of  education,  of  opportunity,  leaves  enormous  re- 
sources of  ability  untapped.  The  inertia  of  class  habits, 
the  barriers  of  tradition  and  custom,  the  difficulties  of  the 
struggle  upward, — all  such  factors  prevent  great  dormant 
capacities  from  ever  being  kindled  into  irresistible  ambi- 

1  Space  does  not  permit  a  fuller  analysis  of  this  very  important 
factor  in  income  inequalities.  Special  references  of  much  value 
will  be  found  in  Cannan's  "Wealth,"  particularly  Chapter  XII, 
and  Dalton's  "The  Inequalities  of  Income,"  pp.  239-270;  Taussig's 
"Principles  of  Economics,"  Chapter  54,  Pigou's  "Wealth  and  Wel- 
fare," and  "Watkin's  "Growth  of  Large  Fortunes." 


Capital  225 

tions  to  win  the  highest  rewards  of  economic  activity.  The 
degree  of  success  achieved  by  the  present  economic  system 
is  largely  due  to  the  fact  that  in  spite  of  all  such  barriers 
and  obstructions  the  business  world  does  arouse  the  ener- 
gies and  ambitions  of  enough  men  of  great  ability  to  win 
their  way  from  the  bottom  to  the  top  so  that  it  constantly 
recruits  a  reasonable  amount  of  able  leadership. 

Inequalities  Due  to  Unequal  Privileges 

The  chief  inequalities  of  privileges  are  those  arising  from 
inheritance,  monopoly  powers,  and  unforeseen  chance. 

Inheritance  is  a  primary  cause  of  the  more  extreme  ine- 
qualities of  income  and  ownership.  Some  people  at  birth 
are  heirs  to  fortunes;  others  are  heirs  to  nothing  at  all. 
Enormous  estates  are  handed  down  from  generation  to  gen- 
eration and  perpetuate  the  chasm  between  the  extremes  of 
possessors  and  non-possessors.^  It  has  been  estimated  that 
"four-fifths  of  the  one  hundred  and  fifty  or  more  fortunes 
in  the  United  States  having  incomes  of  over  $1,000,000  a 
year  have  been  accumulating  foj'  two  generations  or 
more.  "^  In  England,  where  the  influence  of  inheritance 
has  had  a  longer  time  to  work  itself  out,  "the  number  of 
wealthy  men  at  the  top  is  two  and  a  quarter  times  as  great, 
in  proportion  to  population,  .  .  .  as  in  the  United 
States." 

At  the  other  end  of  the  scale  stands  the  common  worker, 
with  practically  no  belongings  except  a  few  articles  of 
furniture  and  some  items  of  clothing.  Probably  three  out 
of  five  of  the  children  of  the  country  are  born  into  prop- 
ertyless  families.  Children  of  these  classes  inherit  only 
bodies  and  brains  to  work  with  capital  owned  by  others. 
Nothing  is  handed  down  to  them  in  the  form  of  a  com- 
petence to  begin  life  on.  They  have  no  assured  means  of 
livelihood.  Their  inheritance  points  to  dependence  upon 
the  real  property  owners  of  the  community.^ 

This  contrast  of  inheritance  has  come  to  have  some  very 

iSee  Cannan's  "Wealth,"  pp.  812-184  and  Taussig's  "Economics," 
pp.  248-250. 

2  Irving  Fisher,   American  Economic  Review,  March,   1919,  p.    12. 
sHobhouse,  "Property,  Its  Rights  and  Duties,"  p.  21. 


226  Capital 

serious  results.  The  man  who  inherits  property  inherits 
not  merely  an  assured  income;  he  receives  the  power  of 
control  over  the  lives  of  a  group  of  workers.  The  mind  of 
the  worker  has  come  to  feel  a  stinging  sense  of  discourage- 
ment and  injustice  in  the  arrangement.  He  sees  many 
people  living  on  inherited  fortunes  without  doing  any  gen- 
uinely useful  work  and  he  sees  his  own  group  working  hard 
for  a  living  which  in  comparison  is  rude  and  insecure. 
From  the  viewpoint  of  an  outsider,  the  sense  of  injustice 
appears  well  founded.  This  outside  viewpoint  is  ad- 
mirably stated  by  Bishop  Charles  Gore  of  Oxford,  as 
follows : 

' '  The  success  of  civilization  for  us  must  be  measured  not 
by  the  amount  and  character  of  its  products  or  material 
wealth,  nor  by  the  degree  of  well-being  which  it  ren- 
ders possible  for  a  privileged  class,  but  by  the  degree  in 
which  it  enables  all  its  members  to  feel  that  they  have  the 
chance  of  making  the  best  of  themselves,  to  feel  that  an 
adequate  measure  of  free  self-realization  is  granted  them. 
On  this  ground  then  our  civilization  is  open  to  the  most 
serious  indictment.  ...  In  our  own  civilization  we  find 
vast  masses  of  men  and  women  who  cannot  be  reasonably 
devscribed  as  having  any  adequate  measure  of  property  for 
use.  They  cannot  go  into  life  with  the  security  of  free 
men.  They  cannot,  within  reasonable  limits,  control  their 
own  destiny.     They  cannot  realize  themselves." 

Out  of  this  situation  arises  in  large  measure  the  discon- 
tent of  the  common  man.  Gross  inequalities  of  fortune  are 
behind  unrest.  And  the  labor  movement,  the  reform  move- 
ment, the  progressive  movement,  the  movement  of  all  social 
forces  is  in  the  nature  of  an  attack  upon  the  extreme  in- 
equalities which  are  perpetuated  by  the  established  system 
of  inheritance.  Persons  who  acquire  fortunes  by  inheri- 
tance cannot  offer  the  claim  that  their  fortunes  are  due  to 
their  own  superb  abilities.  These  fortunes  were  earned  by 
the  abilities  of  a  generation  now  dead.  The  democratic 
challenge  in  industry  directly  relates  to  these  unearned  and 
undemocratic  inequalities  of  property.  Inheritance  as  a 
part  of  the  institution  of  property  is  on  the  defensive  and 


Capital  227 

has  to  seek  grounds  to  justify  itself.  The  principles  of 
inheritance  are  in  a  stage  of  drastic  transformation  because 
of  the  social  forces  of  the  times. 

This  transformation  is  the  more  possible  because  inheri- 
tance is  not  established  as  an  inherent  and  inalienable 
right  of  property.  The  preponderant  judicial  opinion 
makes  inheritance  a  custom  or  tradition  of  economic  soci- 
ety which  can  be  modified  and  altered  whenever  social 
needs  make  new  customs  and  traditions  desirable.^ 

The  war  made  so  many  new  large  property  owners  that 
the  importance  of  the  situation  is  greatly  enhanced.  It 
is  estimated  from  income  tax  returns  that  the  war  lifted 
from  twelve  to  fifteen  thousand  new  members  to  the  mil- 
lionaire class.  Some  of  these  accessions  to  the  millionaire 
group  were  due  to  the  rise  of  price  levels  which  automatic- 
ally enhanced  the  price  measure  of  property  without  actu- 
ally changing  the  amount  of  the  property  itself.  The  large 
fortunes  moreover  do  not  stand  still.  Through  dividends, 
interest  and  rent  they  are  steadily  on  the  increase.  The 
largest  amount  of  saving  is  done  by  the  largest  property 
holders,  and  these  savings  mean  more  investments  and 
more  income.  Their  savings  are  large,  not  because  their 
consumption  is  small,  but  because  their  income  is  extraor- 
dinary.   The  inequality  thereby  mounts  higher  and  higher. 

Whatever  may  be  thought  of  the  ability  of  the  recipients 
of  the  largest  fortunes,  at  least  that  ability  is  great  enough 
to  retain  the  fortunes.  A  recent  estimate  places  the  num- 
ber of  fortunes  between  $5,000,000  and  $10,000,000,  hand- 
ed down  during  the  present  generation,  at  five  hundred. - 
In  the  original  building  of  the  great  fortune,  a  high  degree 
of  genius  and  unswerving  energy  is  ordinarily  the  telling 
factor.  Only  the  man  of  force  of  character  and  consider- 
able shrewdness  can  start  with  little  or  no  means  and  pull 
himself  up  to  a  wealthy  position.  But  once  the  fortune  is 
amassed,  and  handed  down  to  a  succeeding  generation,  it 
requires  only  an  indifferent  ability  to  hang  onto  it.  As 
G.  P.  Watkins  remarks,  "Keeping  riches  once  gained  is 

1  Fisher,  American  Economic  Review,  March,  1919,  p.   12. 

2  H.  n.  Klein,  "Dynastic  America  and  Tliose  Who  Own  It." 


228  Capital 

easier  than  ever  before.  .  .  .  The  rich  by  inheritance  have 
a  position  which  they  can  lose  only  by  a  destructive  ten- 
dency amounting  almost  to  madness."^  The  inheritor  of  a 
fortune  who  lacks  the  ability  to  manage  the  fortune,  or 
who  desires  not  to  be  bothered  with  the  responsibility, 
can  hire  a  trust  company  to  give  expert  management  of  the 
property.  So  inequality  begets  greater  inequality,  and  in- 
heritance without  severe  restriction  lies  prominently  at  the 
bottom  of  the  situation.- 

All  of  this  is  not  to  deny  that  a  substantial  amount  of 
inheritance  is  desirable.  It  is  beneficial  to  the  recipient  be- 
cause it  gives  him  a  superior  opportunity  at  the  start  of 
life.  It  makes  for  the  security  of  himself  and  his  family. 
It  is  good  for  society  that  inheritance  within  limits  should 
be  preserved.  The  entire  difficulty  springs  from  immoder- 
ate bequests  and  the  consequent  excessive  and  dangerous  in- 
equalities. The  social  attack  upon  inheritance  is  not  upon 
inheritance  itself,  but  upon  the  undue  concentration  of  it. 
The  social  movement  seeks  a  wilder  distribution  of  inheri- 
tance,— more  inheritance  by  the  mass  of  people  and  less 
inheritance  by  the  concentrated  handful.  As  Taussig  is 
careful  to  remind  his  readers,  "Inheritance,  in  sum,  is 
an  indispensable  part  of  the  institution  of  property."^ 

The  principles  determining  the  condition  by  which  in- 
heritance shall  be  placed  under  social  control  are  chiefly 
psychological.  First  of  all,  the  limitations  on  inheritance 
must  be  high  enough  to  affect  favorably  the  motives  of  the 
various  parties  concerned.  The  inheritance  tax  must  be 
rigid  enough  so  that  the  people  receiving  a  bequest  are  not 
thrown  on  easy  street  nor  given  the  feeling  that  they  are 
freed  from  the  necessity  for  making  good  in  individual 
economic  service.  As  Ross  warns,  "Not  that  a  son  may 
not  inherit  enough  of  his  father's  wealth  to  live  on,  but 
that  no  one  may  inherit  a  fortune  so  large  as  to  kill  in 
him  all  incentive  to  work  and  to  tempt  him  into  an  extrava- 

1  "Growth  of  Large  Fortunes,"  p.  159. 

2  Dalton,  "The  Inequality  of  Incomes,"  p.  329. 

3  Taussig,  "Economics,"  p.  251.  See  also  Ely,  "Property  and  Con- 
tract," pp.  425-426. 


Capital  229 

gance  of  expenditure  and  conduct  which  discourages  or 
corrupts  the  useful  members  of  society. '  '^  The  inheritance 
taxation  must  then  be  severe  enough  to  reduce  those  glar- 
ing inequalities  which  give  the  ordinary  man  a  sinking  of 
the  heart  and  a  bitter  sense  of  the  hopelessness  of  trying  to 
get  ahead.  This  psychological  necessity  is  clearly  stated 
in  one  of  Theodore  Roosevelt's  messages  to  Congress. 
Roosevelt  declared  that  the  reduction  of  the  gross  contrasts 
of  inherited  wealth  would  "help  to  promote  a  measurable 
equality  of  opportunity  for  the  people  of  the  generations 
growing  to  manhood."^  Inheritance  taxation  should  also 
be  measured  by  its  effects  on  the  men  who  have  the  ability 
to  earn  great  fortunes  by  strenuous  business  endeavor. 
The  man  who  makes  a  large  fortune  has  the  opportunity  to 
use  it  in  the  form  of  public  gifts  and  benefactions  which  re- 
flect large  personal  esteem  and  prestige  upon  the  donor. 
If  the  rich  man  realizes  that  unless  he  does  make  large 
public  benefactions,  his  property  will  in  large  measure  be 
taken  by  the  State  at  his  death,  he  is  likely  to  prefer  to 
make  the  benefactions.  With  the  anticipation  that  the 
State  will  take  a  large  share  of  the  property  which  he  does 
not  give  away  before  his  death,  the  ordinary  man  of  wealth 
would  be  induced  to  take  to  heart  the  claim  of  Andrew 
Carnegie  that  it  is  a  crime  for  a  man  to  die  rich,  and 
that  the  only  human  and  decent  procedure  is  to  bestow  the 
fortune  for  useful  social  purposes  during  the  owner's  life. 
Millionaires  might  thus  be  inspired  to  give  parks  to  cities, 
build  art  galleries  or  libraries,  endow  universities,  establish 
foundations  for  scientific  and  medical  research,  provide 
hospitals,  subsidize  deserving  philanthropic  causes,  etc.^ 
Inheritance  taxation  should  be  so  regulated  as  to  stimu- 
late favorably  the  motives  of  fortune  owners  to  give  wisely 
and  generously  for  social  purposes;  to  stimulate  the  recip- 
ients of  inherited  fortunes  to  work  for  their  own  salvation ; 
and  to  keep  alive  the  hope  of  economic  success  among  the 
masses. 

1  "Principles  of  Sociolo^,"  p.  385. 

2  Sixtieth  Congress,  Vol.  42,  Part  1,  pp.  71-72. 

3  See  Carnegie's,  "The  Gospel  of  Wealth." 


230  Capital 

Secondly,  the  converse  of  this  proposition  is  that  the  tax- 
ation should  not  be  so  great  as  to  cause  evil  psychological 
effects.  If  too  much  of  a  fortune  is  taken  by  the  State, 
men  will  be  discouraged  from  wanting  to  make  money.  A 
certain  amount  of  inheritance  is  useful  as  an  inducement 
or  reward  for  men  to  throw  themselves  strenuously  into 
business  endeavor.  The  prospect  of  handing  property 
down  to  their  children  stimulates  men  to  create  a  compe- 
tence for  themselves  and  their  families.  But  beyond  a 
certain  point  the  family  motive  is  displaced  by  other  mo- 
tives. Irving  Fisher  found  that  the  business  man's  accu- 
mulating motives  beyond  a  certain  point  "were  rather 
those  of  power,  of  self-expression,  of  hunting  big  game." 
Inheritance  taxation  which  would  stifle  the  basic  impulses 
of  men  of  great  ability  in  business  would  defeat  its  own 
purposes. 

The  exact  tax  rates  which  strike  this  psychological  bal- 
ance are  vstill  a  matter  of  political  experiment.  In  43  States, 
inheritance  taxes  of  some  sort  existed  in  1917,  with  rates 
ranging  for  direct  heirs  from  one  to  fifteen  per  cent,  and 
for  collateral  heirs  from  three  to  thirty  per  cent.  The 
Federal  Government  in  1919  had  an  inheritance  tax  on 
beneficiaries  running  from  one  to  twenty-five  per  cent. 
Most  European  countries  have  established  substantial  in- 
heritance tax  rates.  The  principle  is  accepted  by  most  ad- 
vanced nations,  and  may  be  looked  upon  as  established  in 
its  fundamental  implications. 

Monopoly  Privileges  a  Cause  of  Inequalities 

Special  privileges  and  monopoly  advantages  are  abun- 
dant in  the  economic  system.  Illustrations  would  include 
avenues  for  inside  information  in  stock  speculation,  secret 
knowledge  of  the  sections  of  future  city  development  as 
a  clue  to  real  estate  investment,  patent  rights,  franchises  to 
railways  and  other  public  utilities,  power  to  fix  monopoly 
prices,  favoritism  in  the  granting  of  contracts,  devices  of 
unfair  competition,  superior  possession  or  monqpoly  of 
raw  materials  and  other  resources,  superior  bargaining 
power  with  lesser  companies  or  with  labor,  tax  exemptions, 


Capital  231 

trade-union  influences,  etc.^  Monopoly  privileges  may  exist 
among  labor  groups  as  well  as  among  property  groups,  and 
often  it  occurs  that  a  labor  monopoly  is  matched  in  an 
economic  struggle,  quietly  or  openly,  with  property  monop- 
olies. In  the  general  run  of  cases,  these  monopoly  advan- 
tages tend  to  further  the  inequalities  of  ownership  and 
income. 

This  analysis  does  not  imply  that  monopoly  advantages 
are  indefensible.  Most  monopoly  advantages  contain  ele- 
ments of  real  service  to  society.  In  many  cases,  they  are 
the  creation  of  men  of  great  genius  and  ability.  A  patent 
monopoly,  for  instance,  often  arises  in  this  way.  A  monop- 
oly advantage  is  not  a  sign  that  a  man  has  fallen  without 
effort  into  easy  street.  The  men  of  towering  ability  create 
special  privileges  for  their  business  undertakings  where 
such  privileges  are  necessary.  There  are  good  and  bad 
monopoly  advantages,  and  those  which  are  the  result  of 
ability  and  those  which  are  not.  The  bad  privileges  are 
almost  invariably  strong  causes  of  inequalities  of  fortune, 
and  the  good  privileges  in  no  small  measure  work  to  the 
same  end,  although  in  the  latter  eases  the  inequalities  are 
apt  to  be  a  reflection  of  ability  that  brought  substantial 
public  good. 

John  R.  Commons  gives  evidence  to  indicate  that  about 
four-fifths  of  the  millionaire  fortunes  have  been  derived 
from  permanent  monopoly  privileges.  The  largest  of  these 
fortunes  are  thought  to  have  benefited  most  thoroughly  by 
special  privileges,  for  it  is  estimated  that  ''perhaps  ninety- 
five  per  cent,  of  the  total  values  represented  by  these  mil- 
lionaire fortunes  is  due  to  those  investments  classed  as  land 
values  and  natural  monopolies  and  to  competitive  indus- 
tries aided  by  such  monopolies."  ^  In  the  building  of  these 
fortunes,  personal  ability  counted  primarily,  but  personal 
ability  consisted  of  the  power  to  create  and  the  genius  to 
use  monopoly  advantages.  It  is  in  this  way  that  monopoly 
advantages  foster  inequalities  of  possessions. 

A  careful   and  scientific  authority,  J.  W.   Jenks,  con- 

1  See  G    Mvers's  "History  of  the  Great  American  Fortunes." 

2  "The  Distribution  of  Wealth,"  p.  252. 


232  Capital 

eludes  a  study  of  the  winning  of  great  fortunes  by  a 
summary  which  is  substantially  in  line  with  these  opin- 
ions. He  says,  "Let  me  emphasize  again  what  I  said  be- 
fore, that  it  is  probably  in  and  through  the  exercise  of  the 
principle  of  plunder  or  the  undue  exercise  of  advantage, 
of  gambling  or  of  its  allied  principle  of  monopoly,  or  of 
special  privilege  or  favor  of  some  kind  that  many,  very 
many,  if  not  most  of  the  greatest  fortunes  have  been  won. '  '^ 

Unforeseen  Chance  as  a  Cause  of  Inequalities 

Luck,  circumstance,  an  unexpected  turn  of  events,  acci- 
dent, and  fortuitous  change  all  play  an  important  part  in 
the  winning  of  large  fortunes.  "Two  men  earn  equal 
amounts  because  they  are  of  about  equal  ability  and  indus- 
try and  work  at  the  same  trade ;  they  save  equal  amounts, 
and  invest  with  what  good  authorities  would  consider  equal 
judgment,  but  the  investment  of  the  one  turns  out  for- 
tunate and  that  of  the  other  unfortunate.  The  one  becomes 
rich  and  the  other  remains  poor."-  Likewise,  the  varia- 
tions in  the  price  level  affect  deeply  the  value  of  invest- 
ments and  the  purchasing  power  of  fixed  incomes.  A 
dollar  of  permanent  investment  before  the  war  would  in 
post-war  prices  have  a  purchasing  power  of  about  fifty 
cents.  With  a  shrinkage  of  the  dollar  in  a  period  of  infla- 
tion there  goes  a  violent  fluctuation  in  the  value  of  all  forms 
of  property.  A  new  railroad  built  through  one  section  of 
a  city  increases  the  real  estate  values  of  the  neighborhood, 
a  new  law  passed  by  the  legislature  curbs  or  releases  profit- 
making  power,  a  costly  strike  or  a  poor  wheat  crop  swings 
fortunes  up  or  down  as  the  case  may  be.  Perhaps  the 
greatest  factor  of  chance  is  the  profit  system  itself.  Profit 
is  paid  as  a  reward  for  risk.  The  business  man  takes  his 
chances  and  in  recompense  receives  a  profit.  The  more 
risky  the  business  presumably  the  higher  the  profit  deserves 
to  be.  The  element  of  chance  is  in  this  way  definitely  in- 
corporated in  the  property  institution  as  an  indispensable 
element,  and  one  deserving  of  large  rewards. 

1  "Great  Fortunes,  The  Winning  and  Using,"  p.  41. 

2  Cannan's  "Wealth,"  p.  187. 


Capital  233 

The  greater  the  risk,  the  greater  the  rightful  profit,  and 
in  consequence,  the  greater  the  inequality  of  wealth.  Ob- 
viously if  the  risks  and  chances  in  business  could  be  reason- 
ably and  substantially  reduced,  the  inequalities  of  wealth 
might  be  reduced  accordingly.  It  has  been  proposed  that 
in  important  business  undertakings  the  Government  might 
underwrite  the  venture,  and  by  a  form  of  public  insurance, 
reduce  the  unnecessary  risks  and  chances.  The  Govern- 
ment in  certain  ways  has  already  taken  steps  in  this  direc- 
tion. The  Federal  Reserve  System  has  in  a  very  far  reach- 
ing way  reduced  risks  in  the  field  of  banking  and  credit. 
The  Interstate  Commerce  Commission  and  Federal  legisla- 
tion guaranteeing  minimum  returns  to  railroads  have  fun- 
damentally modified  the  nature  of  risks  in  that  branch  of 
economic  enterprise.  Outside  of  government  support,  the 
principle  of  insurance  has  been  extended  over  one  risk 
after  another  in  business  undertakings.  Fire,  accident, 
health,  and  executive  or  managerial  insurance, — these  rep- 
resent a  steady  expansion  of  the  insurance  principle. 
"Cannot  a  similar  principle  be  applied  to  the  risk  of  in- 
dustrial loss?  If  it  were  possible  to  guarantee  every 
entrepreneur  at  least  his  operating  expenses,  including  de- 
preciation, the  loss  would  be  minimized."^  The  proposal 
is  in  only  a  beginning  stage,  but  its  fundamental  principle 
appears  to  be  essentially  sound  from  an  economic  point 
of  view.  If  it  is  worked  out  practically  in  the  course  of 
time,  the  effect  upon  the  inequalities  of  wealth  would  be  of 
importance. 

The  three  main  groups  of  causes  of  inequalities  of  privi- 
lege, namely,  inheritance,  monopoly,  chance,  are  not  static, 
fixed  causes.  They  are  elements  in  tlie  whole  institution 
of  property  and  under  the  pressure  of  the  dynamic  social 
and  economic  movement  of  the  times,  they  are  open  to 
constructive  modification.  The  inequalities  of  privilege 
and  the  inequalities  of  ability  stand  side  by  side  as  the 
great  factors  in  maintaining  the  inequalities  of  income  and 
ownership.  Both  unequal  ability  and  unequal  privilege 
stand  as  inseparable  parts  of  the  institution  of  property. 

1  David   Friday,  "Profits,   Wages   and  Prices,"  Chapter  XIV. 


234  Capital 

There  is  no  widespread  desire  to  eliminate  them.  But  a 
modification  of  their  essentials  so  as  to  secure  in  the  natural 
course  of  events  a  wider  diffusion  of  property,  and  better 
distribution  of  opportunity  for  ability  to  show  itself  is  the 
social  demand  upon  the  economic  system. 

REFERENCES 

Cannan,  E.:  Wealth 

PiGOu:   Economics  of  Welfare;  Wealth  and  Welfare 

Dalton,  H.  :   Inequality  of  Income 

Friday,  David:  Profits,  Wages  and  Prices 

King,  W.  I.:  Wealth  and  Income  of  the  People  of  the  United 
States 

Sydenstricker  and  King:  Population  and  Income,  Journal  of 
Political  Economy,  Vol.  29,  pp.  571-585 

Gerstenberg,  C.  W.:   Materials  of   Corporation  Finance 

Fisher,  I.:  Nature  of  Capital  and  Income;  The  Purchasing 
Power  of  Money,  Chapters  I-VIII 

Davenport:  Value  and  Distribution;  The  Economics  of  Enter- 
prise 

Carnegie,  Andrew:  The  Gospel  of  Wealth 

Ely,  R.  T.  :  Property  and  Contract  in  their  Relations  to  the 
Distribution  of  Wealth 

HoBHOUSE  and  Others:   Property 

Ely  and  Others:   The  Foundations  of  National  Prosperity 

HoBSON,  J.  A.:   The   Economics   of  Distribution 

Lyon,  W.  H.  :  Capitalization 

Orth  :  Readings  on  the  Relation  of  Government  to  Property 
and  Industry 

Groat:  Attitude  of  American  Courts  in  Labor  Cases 

Beard,  C.  A.:  An  Economic  Interpretation  of  the  Constitution 
of  the  United  States;  Economic  Origins  of  Jeffersonian  De- 
mocracy 

Goodnow:   Social  Reform  and  the  Constitution 

Marshall,  L.  C.  :  Readings  in  Industrial  Society,  Chapter  14 

Taussig:   Principles  of  Economics,  Chapter  54 

Hamilton,  W.  H.:  The  Price  System  and  Social  Policy,  Jour- 
nal of  Political  Economy,  Vol.  36,  p.  31 

Meade,  E.  S.:  Corporation  Finance 

Hobson:   Work  and  Wealth 

Clay,  Henry:  Economics  for  the  General  Reader,  Chapters  23-25 

Commons,  J.  R.:  Trade  Unionism  and  Labor  Problems,  Part  5 

Jenks,  J.  W. :   Great  Fortunes 

Simpson,  K. :  Capitalization  and  Good-Will;  Johns  Hopkins 
University  Studies,  Series  XXXIX,  No.  1 


Capital  235 

Carver,  T.  N.:  Distribution  of  Wealth 

Federal  Commission  on  Industrial  Relations,  Vol.  I,  1915,  Sum- 
mary Report 

Money,  L.  C.  : .  Riches  and  Poverty 

Friday,  David:  Journal  of  Political  Economy,  Vol.  26,  p.  962  ff. 

Cooley:   Social  Process 

Ritchie,  D.  G.:  Natural  Rights 

Pound,  Roscoe:  Liberty  of  Contract,  Yale  Law  Journal,  Vol. 
18,  pp.  454-487 

Watkins,  G.  p.:   The  Growth  of  Large  Fortunes 

Fisher,  I.:   American   Economic  Review,   March,   1919 

Myers,  G.  :  History  of  the  Great  American  Fortunes 

Clark,  J.  B.:   The   Distribution  of  Wealth 

Dickinson,  G.  Lowes:  Justice  and  Liberty 

Carver,  T.  N.;  Essays  on  Social  Justice 


CHAPTER  VIII 

MANAGEMENT:    ITS    TECHNIQUE    AND    RESPONSIBILITIES 

The  economics  of  a  previous  period  classified  the  factors 
of  production  under  three  headings, — land,  labor,  and  capi- 
tal. The  economic  developments  of  recent  years  have 
brought  to  the  front  a  fourth  fundamental  factor,  manage- 
ment. Management  exists  primarily  for  the  purpose  of 
bringing  into  balance  all  of  the  multitudinous  forces  which 
play  a  part  in  the  success  or  failure  of  the  modern  busi- 
ness concern.  Management  is  responsible  for  bringing  effi- 
ciency out  of  a  chaos  of  scattered  elements.  Management 
functions  by  unifying,  correlating,  organizing  and  adminis- 
tering the  sum  total  of  economic  factors  which  comprise  a 
modern  business  establishment.  Land,  labor,  and  capital 
are,  none  of  them,  taken  singly,  capable  of  complete  self- 
management,  but  they  rely  upon  a  body  of  administrators 
and  governors  who  are  especially  qualified  and  competent 
for  the  managerial  supervision  of  all  the  activities  of  the 
business  concern.  The  significance  of  the  modern  function 
of  management  is  comprehensively  appraised  in  the  follow- 
ing statement  by  Louis  Brandeis:  "The  coming  of  the 
science  of  management,  in  this  century,  marks  an  advance 
comparable  only  to  that  made  by  the  coming  of  the  machine 
in  the  last."^ 

Management  has  been  compelled  to  develop  a  technology 
of  its  own  in  order  to  cope  with  the  almost  infinite  interre- 
lations of  the  present  industrial  regime.  No  single  human 
mind  could  master  and  interpret  the  great  variety  of  tech- 
nical problems  which  underlie  modern  production.  The 
ef^cient  handling  of  labor  on  a  large  scale,  the  appropria- 
tion of  the  most  recent  discoveries  in  all  the  physical  sci- 
X  "Business  a  Profession,"  xlviii,  pp.  2-3. 
236 


Management:    Its  Technique  237 

ences,  the  utilization  of  fundamental  engineering  knowl- 
edge, the  co-ordination  of  all  departments  of  a  business, 
the  adoption  of  scientific  marketing,  the  maintenance  of 
adequate  finances,  the  adherence  to  proper  legal  and  social 
requirements,  the  infusion  of  morale  into  the  working  and 
directing  force, — these  problems  in  their  entirety  would 
baffle  the  most  prodigious  and  ingenious  mind.  There  is 
one  way,  and  only  one  way,  by  which  the  vast  aggregations 
of  facts,  details  and  problems  which  enter  into  a  modern 
business  concern  can  be  brought  into  harmony,  and  that 
one  way  is  by  an  application  of  the  methods  of  science. 

In  some  cases,  large  property  o^vners  have  proved  com- 
petent to  direct  and  manage  their  own  properties;  in  most 
eases,  groups  of  property  owners  have  hired  salaried  man- 
agers, whose  gifts  of  character  especially  fitted  them 
to  perform  the  functions  of  management.  During  the 
last  ten  years  there  has  developed  a  marked  tendency  to 
turn  the  problems  of  management  over  to  specially  trained 
engineers.  It  is  not  enough,  in  more  and  more  instances 
in  modern  industry,  that  a  manager  should  have  been  born 
with  great  ability  as  an  organizer,  or  with  a  genius  for  di- 
recting large  affairs.  It  is  necessary  that  a  manager  should 
be  acquainted  as  an  engineer  with  the  technology  of  man- 
agement, Avith  the  body  of  scientific  principles  and  practices 
which  most  men  of  ability  can  acquire  best  through  a  spe- 
cial course  of  technical  training.  An  observer  of  the  broad 
industrial  situation  states  the  tendency  in  these  words,  "It 
is  becoming  each  year  increasingly  evident  that  a  large  part 
of  the  industrial  leadership  of  the  country  must  come  from 
such  engineer-managers,  who  have  succeeded  the  old  owner- 
managers.  .  .  .  Engineer-managers  who  have  combined 
with  their  knowledge  of  the  material  sciences  a  scientific 
study  of  human  relations  are  usually  superior  to  other  in- 
dustrial managers  in  their  approach."^ 

The  problems  of  management  are  in  great  measure   a 

reflection  of  the  size  of  modem  business  establishments. 

Everybody  knows  that  business   combinations   and   large 

establishments    are   widespread    in    the    present   economic 

1  S.  A.  Lewisolin,  Atlantic  Monthly,  Vol,  126,  pp.  414-418, 


238  Management:    Its  Technique 

system.  This  popular  impression  overlooks,  however,  the 
important  fact  that  small  business  establishments  are  not 
by  any  means  a  thing  of  the  past.  Statistics  for  1914  show 
that  in  the  United  States  there  were  in  that  year  no  less 
than  140,971  manufacturing  establishments  which  em- 
ploj^ed  less  than  six  wage  earners  each.  A  manufacturing 
establishment  employing  not  to  exceed  100  wage  earners 
would  not  appeal  to  the  average  imagination  as  a  large  en- 
terprise ;  but  it  needs  to  be  remembered  that  in  1914  there 
were  262,217  establishments  no  larger  than  that.  The  small 
establishment  is  not  dead  and  gone.  These  smaller  estab- 
lishments comprise  95  per  cent,  of  all  manufacturing  con- 
cerns in  America.  On  the  other  hand,  the  relatively  few 
large  establishments  represent  such  vast  aggregations  of 
manufacturing  enterprise  that  they  employ  the  great  bulk 
of  the  wage  earners  of  the  countr3^  The  remaining  5 
per  cent,  of  establishments  employ  fully  65  per  cent,  of  the 
wage  earners.  Another  comparison  of  figures  indicates 
more  strikingly  the  scope  of  the  large  business  units.  The 
1  per  cent,  of  the  establishments  of  the  country  which  are 
the  largest  employ  about  the  same  number  of  wage  earn- 
ers as  the  95  per  cent,  of  smallest  establishments.  More- 
over, over  four-fifths  of  the  annual  product  comes  from 
plants  which  individually  turn  out  each  year  goods  valued 
at  more  than  $100,000.  Nearly  one-half  of  the  annual 
product  comes  from  plants  whose  individual  turn-out  each 
year  exceeds  a  value  of  $1,000,000.  Hence,  the  great  bulk 
of  wage  earners  are  employed  in  establishments  which  hire 
hundreds  or  thousands  of  workers,  and  the  main  portion 
of  the  national  product  is  made  in  establishments  whose 
annual  output  has  to  be  figured  in  hundreds  of  thousands 
or  millions  of  dollars.  The  little  establishments  flourish, 
and  in  total  numbers  of  individual  plants  show  impressive 
figures;  but  when  they  are  measured  by  the  work  which 
they  do,  by  the  workers  they  employ,  by  the  value  of  their 
output,  they  recede  to  a  minor  part  in  the  productive  equip- 
ment of  the  nation.  The  major  industrial  activity  of  the 
country  is  the  activity  of  big  business,  and  for  a  clear  con- 
ception of  the  true  state  of  the  economic  organization,  it  is 


Management:    Its  Technique  239 

imperative  that  the  facts  about  the  relative  size  of  business 
establishments  should  be  kept  vt^ell  in  mind.^ 

The  main  trends  toward  business  concentration  have 
been  comparatively  recent.  Industry  during  the  Civil  War 
period  was  characterized  by  small  establishments  for  the 
most  part.  Since  that  time,  in  thirteen  leading  lines  of  in- 
dustry, the  number  of  wage  earners  in  each  plant  has  in- 
creased seven  times  over,  the  value  of  the  output  of  each 
plant  nineteen  times,  and  the  amount  of  capital  thirty-nine 
times.  This  industrial  evolution  in  the  direction  of  con- 
centration began  to  be  conspicuous  during  the  eighties  of 
the  last  century.  The  trust  movement  came  into  notoriety 
during  the  next  decade,  and  as  the  trust  fell  under  the 
ban  of  the  law,  the  late  nineties  and  the  first  years  of  the 
new  century  witnessed  the  development  of  holding  com- 
panies and  consolidations  of  one  sort  and  another.  Com- 
binations came  swiftly  during  periods  of  prosperity,  but 
during  years  of  panic  or  depression  they  were  rarely 
formed.  The  great  era  of  consolidation  in  this  country 
was  the  fifteen  years  preceding  the  depression  of  1903. 
That  depression  slowed  up  the  combination  movement,  and 
from  1903  down  to  the  opening  of  the  European  "War, 
the  business  consolidations  were  less  sensational  and  less 
extensive.  The  war  period  gave  new  impetus  to  combina- 
tion in  many  lines.  It  is  essential  to  remember  that  the 
business  combinations  of  the  present  day  are  the  creation 
of  the  last  thirty  years  of  economic  history,  and  that  most 
of  the  fundamental  consolidations  were  pretty  definitely 
determined  during  the  first  half  of  that  thirty-year 
period.^ 

Classification  of  Types  of  Management 

There  is  no  one  uniform  type  of  management  for  all 
establishments.     The  various  sizes  and  conditions  of  busi- 

1  See  statistical  Abstract  of  the  United  States,  1919,  pp.  190-195. 

2  See  A.  Dewing's  "Financial  I'olicy  of  Corporations,"  TV,  33-41; 
Eipley's  "Trusts,  Pools  and  Corporations."  Introduction;  I.  Lip- 
pincott's  "Economic  Development  of  the  United  States,"  Chapter 
XXT:  C.  E.  Van  Hise's  "Concentration  and  Control,"  pp.  35-59; 
J.  W.  Jenks,  "The  Trust  Problem,"  Chapter  I. 


240  Management:    Its  Technique 

ness  concerns  have  brought  into  operation  widely  varying 
types  of  management.  On  broad  lines  of  classification,  the 
three  outstanding  types  are  the  individual,  the  partnership, 
and  the  corporation. 

In  the  individual  type,  the  owner  and  the  manager  are 
usually  one  and  the  same  person.  The  individual  carries 
on  the  business  with  his  own  brains,  largely  with  his  own 
money,  and  upon  his  own  responsibility.  For  the  most 
part,  this  type  of  management  is  suited  to  relatively  small 
enterprises.  Agriculture  is  largely  under  the  individual 
type  of  management,  and  a  substantial  portion  of  retail 
trade  is  conducted  by  individual  merchants.  But  in  manu- 
facturing, less  than  8  per  cent,  of  the  total  national  product 
is  made  under  the  individual  type  of  management.  The 
individual  managers  usually  have  small  plants,  and  the 
lines  of  manufacture  where  the  small  individual  manage- 
ment survives  in  largest  numbers  are  such  as  baking,  cloth- 
ing, printing,  dairy  products,  blacksmithing,  and  the  like. 
Individual  management  normally  has  the  advantage  of  the 
direct,  personal,  immediate  attention  of  the  man  whose 
whole  fortune  is  at  stake.  It  rests  upon  highly  commendable 
qualities  of  character  such  as  thrift,  initiative,  honesty,  re- 
sponsibility, and  by  providing  an  opportunity  for  men  to 
make  good  in  business  in  a  small  way,  it  often  brings  men 
of  ability  to  the  attention  of  larger  establishments.  Small 
business  is  in  many  ways  a  training  ground  and  a  stepping 
stone  toward  promotions  into  the  more  difficult  managerial 
positions  of  larger  business  units.  From  an  economic 
point  of  view,  it  is  of  the  utmost  importance  that  the  big 
business  concern  should  not  develop  in  such  a  fashion  as  to 
block  the  way  for  men  who  desire  to  set  up  businesses  of 
their  own.  The  hundreds  of  thousands  of  small  individual 
managers  deserve  as  much  freedom  of  opportunity  to  make 
good  as  can  possibly  be  given  them,  and  the  practices  of 
big  concerns  cannot  be  allowed  to  choke  out  reasonable  op- 
portunities for  small  ones  to  get  ahead  by  efficiency,  fore- 
sight, and  good  judgment.^  The  small  business  man  in  his 
individual  plant  has  a  part  to  play  in  economic  life  which, 
1  See   Woodrow   Wilson,   "The   New   Freedom." 


Management:    Its  Technique  241 

ill  its  own  way,  is  just  as  important  as  the  part  played 
by  larger  types  of  management. 

In  the  partnership  type,  two  or  more  individuals  unite 
their  capital  or  their  ability,  or  both,  and  overcome  some 
of  the  fundamental  limitations  of  individual  management. 
As  business  becomes  complicated,  the  single  individual  is 
apt  to  find  the  problems  too  great  to  be  solved  effectively 
by  one  mind,  and  management  may  often  be  made  more 
effective  by  combining  the  ability  and  judgment  of  differ- 
ent men.  At  the  same  time,  the  single  individual  is  likely 
to  reach  a  point  where  his  individual  capital  is  inadequate 
to  finance  the  business,  and  the  associated  capital  of  part- 
ners aids  in  solving  the  problem.  The  ordinary  partner- 
ship stands  in  the  eyes  of  the  common  law  as  a  financial 
unit.  A  contract  by  one  of  the  partners  binds  all,  and  in 
case  of  insolvency  each  partner  is  liable,  not  merely  to 
the  amount  which  he  invested  in  the  business,  but  to  the 
full  amount  of  his  total  property.  Partnerships  appear 
to  be  diminishing  in  importance  relative  to  other  types  of 
management.  Their  chief  field  is  moderate  sized  mercan- 
tile and  manufacturing  enterprises,  and  the  legal  and  other 
professions.  In  1900,  partnerships  produced  19  per  cent. 
of  the  total  value  of  all  products,  but  in  1914  the  share  of 
the  total  produced  by  partnerships  had  shrunk  to  8.8  per 
cent.  As  in  the  case  of  individual  management,  so  in 
the  case  of  partnerships,  their  function  is  important  even 
though  overshadowed  by  other  types  of  management,  and 
a  fair  and  open  field  for  the  partnership,  wherever  it 
manifests  the  qualities  of  economic  efficiency,  is  thoroughly 
desirable. 

The  paramount  type  of  economic  management  is  the 
corporation.  By  the  statistics  of  1914,  corporations  pro- 
duce 83.2  per  cent,  of  the  total  national  product.  A  corpora- 
tion comes  into  being  by  a  special  charter  granted  by  a 
state.  Some  of  the  chief  characteristics  of  the  corporation 
are  as  follows:  (1)  the  joint  stock  principle  of  ownership, 
under  which  a  scattered  number  of  individuals  may  invest 
their  money  in  a  unit  business  undertaking;  (2)  central- 
ized management  of  the  capital  owned  by  the  scattered  in- 


242  Management:    Its  Technique 

vestors,  under  conditions  which  tend  to  bring  about  reason- 
able efficiency  and  proper  security;  (3)  continuity  of  exist- 
ence, since  if  one  corporation  official  resigns  or  dies,  a  suc- 
cessor is  promptly  chosen,  while  the  life  of  the  corporation 
goes  on  unbroken;  (4)  limited  liability  of  the  owners  of 
the  corporation  capital,  in  that  each  investor  is  liable,  in 
case  of  insolvency  of  the  corporation,  only  to  the  amount 
of  his  individual  investment;  (5)  a  distinctly  corporate 
identity,  in  that  the  corporation  acts  as  a  legal  person,  as 
a  business  unit,  as  an  entity  separate  from  its  constituent 
investors  and  directors. 

The  corporate  type  of  management  is  the  effort  of  busi- 
ness judgment  to  cope  with  the  problems  of  direction  and 
control  of  an  economic  system  constructed  upon  a  founda- 
tion of  machinery,  natural  power,  and  applied  science. 
Individuals  found  the  task  of  owning  the  large  blocks  of 
mechanical  equipment  necessary  in  a  modern  factory,  and 
the  task  of  supplying  adequate  financial  resources,  too  great 
for  the  shoulders  of  single  business  men.  It  became  neces- 
sary to  assemble  the  savings  of  many  individuals,  to  bring 
their  money  together  for  a  concentrated  investment.  The 
savings  of  armies  of  small  investors  could  be  heaped  to- 
gether, and  used  to  supply  the  capital  for  large  business 
undertakings.  The  corporation  supplied  a  large  scale  sys- 
tem of  management  simultaneously  with  the  large  scale 
production  of  wealth  under  the  regime  of  machinery  and 
science. 

As  business  combinations  became  greater  and  greater,  sev- 
eral adaptations  of  the  corporation  principle  seemed  neces- 
sary to  business  men.  One  of  the  earliest  of  these  was  the 
pooling  agreement.  Pools  are  agreements  between  business 
concerns,  whether  corporations  or  otherwise,  to  follow  some 
concerted  policy  of  price  fixation,  or  of  limitation  of  out- 
put, or  of  consolidation  and  pro  rata  sharing  of  profits,  or 
of  division  of  territory  between  companies.  The  agree- 
ments could  not  be  enforced  by  law,  and  hence  were  very 
unstable  since  any  member  of  the  pool  could  withdraw 
whenever  he  considered  it  for  his  best  interests  to  do  so. 
Pools  were  of  questionable  legality,  and  usually  had  to  be 


Management:    Its  Technique  243 

operated  secretly.  During  the  eighties,  corporations  took 
up  with  the  principle  of  the  trust  as  a  more  stable  and 
solid  means  of  combination.  Under  the  trust,  the  stock- 
holders of  each  company  turned  their  stock  over  to  a  small 
board  of  trustees,  who  were  empowered  to  direct  the  affairs 
of  the  group  of  companies.  Stockholders  received  in  ex- 
change for  their  shares  of  stock,  trustees'  certificates,  on 
which  they  drew  dividends  virtually  equivalent  to  the  divi- 
dends on  the  former  shares  of  stock.  This  centralized  the 
management  of  the  constituent  corporations  effectively,  but 
when  the  trust  method  came  up  for  the  consideration  of 
the  courts,  it  was  declared  illegal,  and  gradually  had  to  be 
abandoned  by  the  bulk  of  corporations. 

Business  men  then  looked  around  for  some  method  of 
combination  among  corporations  which  would  stand  the 
analysis  of  the  courts  and  be  within  the  law,  but  which 
would  secure  the  advantages  of  combination  of  manage- 
ment. In  some  cases,  communities  of  interest  were  formed, 
under  which  business  men  bought  up  controlling  interests 
in  the  corporations  which  they  desired  to  direct,  and  with- 
out any  formal  organization  worked  in  unison  in  the  man- 
agement of  the  various  companies.  This  form  of  centrali- 
zation was  at  best  somewhat  loose  and  intangible,  and  many 
corporations  found  it  more  desirable  to  combine  by  creat- 
ing holding  companies.  A  holding  company  was  a  new  and 
distinct  corporation,  whose  purpose  was  to  own  at  least  a 
majority  interest  in  a  group  of  corporations  which  it  de- 
sired to  control.  The  holding  company,  by  its  controlling 
stock  ownership,  could  elect  the  Boards  of  Directors  of  the 
constituent  companies,  and  definitely,  tangibly  and  decis- 
ively centralize  the  management  of  the  entire  organization. 
Each  member  corporation  could  retain  its  subsidiary  exist- 
ence, and  have  its  separate  Board  of  Directors,  and  its  own 
executive  staff,  but  they  in  turn  would  be  elected,  and 
governed  in  their  general  policies,  by  the  official  powers 
of  the  central  holding  corporation.  The  United  States 
Steel  Company  is  the  largest  example  in  American  industry 
of  the  holding  company,  and  by  the  decision  of  the  United 
States  Supreme  Court  on  March  1st,  1920,  this  company 


244  Management:    Its  Technique 

was  declared  legal,  on  tlie  ground  that  "the  law  does 
not  make  mere  size  an  offense."  If  a  holding  company- 
used  its  size  and  power  to  restrain  trade  unreasonably 
or  to  exert  undue  monopoly  influences,  it  would  then  be- 
come illegal.  Some  business  men  have  preferred,  in  place 
of  such  a  form  of  combination,  a  form  by  which  outright 
amalgamation  could  take  place.  By  amalgamation,  a  new 
corporation  is  formed  to  buy  openly  and  fully  a  group 
of  companies.  The  old  corporations  lose  their  former  iden- 
tity, and  are  completely  consolidated,  in  ownership  and 
management,  in  the  new  corporation.  Closely  similar  to 
the  amalgamation  is  the  merger.  Under  the  merger,  one 
corporation  already  in  existence  buys  up  one  or  more  other 
corporations  and  assimilates  the  outsiders  into  its  own 
organization.  The  corporation  which  undertakes  the  mer- 
ger simply  stows  away  inside  itself  some  separate  corpora- 
tions, and  all  are  merged  into  a  consolidated  ownership 
and  management. 

The  cardinal  economic  significance  of  the  variety  of 
forms  of  corporate  combination  is  that  the  modern  produc- 
tion process  has  set  up  forces  which  demand  a  high  degree 
of  concentration  in  the  control  of  economic  activity.  The 
men  of  business  genius  who  built  the  great  corporations 
found  themselves  face  to  face  with  the  need  for  an  adapta- 
tion of  the  corporation  principle  on  a  yet  larger  scale  to  the 
demands  of  modern  industry.  They  experimented  with  va- 
rious devices  of  combination,  and  by  methods  of  trial  and 
error,  adjusting  themselves  to  business  legislation  and  court 
decisions,  they  endeavored  to  solve  the  economic  problems 
which  confronted  them.  The  forces  of  economic  evolution 
moved  in  the  direction  of  concentration  of  ownership  and 
management,  and  all  of  the  types  of  corporate  combination 
were  illustrations  of  the  efforts  of  the  creative  imagination 
of  business  leaders  to  cope  with  the  economic  conditions  of 
their  generation. 

The  Mechanism  of  Corporation  Management 

The  corporation  has  developed  a  mechanism  of  manage- 
ment which  in  its  fundamentals  is  fairly  uniform  through- 


Management:    Its  Technique  245 

out  corporate  industry.  In  its  simplest  elements,  this 
mechanism  involves  a  mass  of  stock  owners,  who  elect  a 
board  of  directors,  who  in  turn  give  some  attention  to  the 
broad  policies  of  the  corporation,  particularly  the  financial 
policies,  and  who  delegate  the  active  management  of  the 
corporation  to  a  group  of  appointed  executive  officials. 
These  executive  officials,  in  their  turn,  choose  departmental 
and  bureau  chiefs,  superintendents,  bosses,  foremen,  and 
laborers,  and  have  charge  of  the  operation  of  the  business. 
This  general  set  of  relations  undergoes  drastic  modifica- 
tions in  the  actual  conduct  of  corporate  affairs,  and  it  is 
necessary  to  study  the  strategies  and  peculiarities  which 
have  penetrated  the  institution  of  corporate  management  in 
actual  practice  in  order  to  have  a  realistic  understanding 
of  the  situation. 

The  body  of  stockholders  exert  very  little  authority  in 
choosing  the  Board  of  Directors.  They  have  the  right  to 
vote,  but  as  the  day  for  voting  approaches,  the  stock- 
holders receive  a  legal  form  to  be  signed  and  returned  to 
some  one  actively  interested  in  guiding  the  election.  This 
legal  form  is  a  proxy,  giving  to  the  actively  interested 
party  the  right  to  cast  the  votes  belonging  to  the  individual 
shareholder  in  any  way  that  may  be  desired.  The  full 
bearing  of  this  practice  is  well  indicated  in  an  examination 
made  by  the  Federal  Commission  on  Industrial  Relations 
of  a  corporation  lawyer  of  wide  experience,  Samuel  Unter- 
meyer.  Mr.  Untermeyer  stated,  "Stockholders  do  not  get 
a  'look  in' — the  scattered  stockholders — as  a  result  of  the 
system.  What  is  the  system?  The  management  send  out 
proxies  every  year,  and  the  proxy  is  a  power  of  attorney 
to  some  one  they  name.  If  you  are  a  stockholder,  you  do 
not  know  to  whom  you  are  giving  your  proxy.  It  does 
not  usually  run  to  the  man  in  control,  but  to  some  one 
nominated  by  him.  You  do  not  know  for  whom  he  is 
going  to  vote  as  a  director.  You  send  a  power  of  attorney 
for  him  to  vote  for  whoever  he  pleases. ' '  Question :  "Is 
it  not  a  fact  that  the  proxy  system  has  become  so  universal 
that  every  country  bank  or  every  country  corporation 
almost,  large  and  small,  when  giving  a  notice  of  stock- 


246  Management:    Its  Technique 

holders'  meeting,  sends  attached,  and  usually  a  part  of 
the  sheet  as  a  notice  of  that  meeting,  a  proxy?" 

Mr.  Untermeyer :  ' '  That  is  the  custom  now  with  notices 
of  meeting,   the   proxy   generally   goes   out.  "^ 

This  system  of  proxies  gives  the  real  authority  in  manage- 
ment to  inside  parties  who  desire  to  maintain  control  of 
the  policies  of  the  corporation.  If  the  inside  parties  are 
men  of  fine  integrity  and  a  high  sense  of  responsibility, 
all  goes  well,  but  if  they  are  not,  the  corporation  is  open  to 
speculative  interests,  and  all  kinds  of  abusive  policies. 
This  situation  is  due  originally  to  the  natural  inertia  of 
the  mass  of  stockholders.  As  was  explained  by  a  promi- 
nent banker  and  director  of  a  number  of  large  corporations, 
Mr.  Jacob  H.  Schiff,  "I  believe  that  the  weakness  of  the 
whole  system  is  the  human  weakness,  that  stockholders,  as 
long  as  things  go  right,  do  not  pay  any  attention  to  the 
management  of  their  property,  and  that  only  when  things 
go  wrong  they  come  to  realize  that  they  are  stockholders, 
and  that  they  should  not  have  permitted  their  property  to 
be  controlled  by  those  who  have  wrongly  or  badly  managed 
it." 

It  is  because  of  this  inertia  of  the  stockholders  that  it  is 
possible  for  small  minority  holdings  of  stock  to  dominate 
the  policy  of  the  whole  corporation.  This  fact  is  expressed 
by  Justice  of  the  Supreme  Court,  Louis  Brandeis,  as  fol- 
lows :  "  As  a  matter  of  fact,  most  stockholders  do  have  very 
little  to  do  with  the  management,  and  in  these  great  cor- 
porations they  have  practically  nothing  to  do.  ...  I 
think  it  is  true  not  only  of  these  very  large  corporations, 
but  of  very  much  smaller  corporations  in  which  the  stock 
is  listed  and  widely  distributed,  that  not  only  a  small  per- 
centage of  the  stock  may  give  control,  but  that  for  a  long 
series  of  years  control  is  held  sometimes  without  the  owner- 
ship of  any  stock  whatsoever,  or  of  practically  no  more 
stock  than  is  necessary  to  qualify  directors.  Such  a  wide 
distribution  of  the  stock  dissipates  altogether  the  respon- 
sibility of  stockholders,  particularly  of  those  with  5  shares, 
10  shares,  15  shares,  or  50  shares.    They  recognize  that  they 

1  "Report  of  Federal  Commission  on  Industrial  Relations,"  1915, 
Vol.  8,  pp.  7438,  7466. 


Management:    Its  Technique  247 

have  no  influence  in  a  corporation  of  hundreds  of  millions 
of  dollars  capital.  By  the  distribution  of  nominal  control 
among  ten  thousand  or  a  thousand  or  a  hundred  thousand 
stockholders,  there  is  developed  a  sense  of  absolute  irre- 
sponsibility on  the  part  of  the  person  who  holds  that  stock. '  '^ 
And  Mr.  Untermeyer,  on  the  same  subject,  states,  "Nearly 
every  railroad  corporation  in  this  country  is  controlled 
with  less  than  10  per  cent,  of  the  stock  in  the  hands  of  all 
the  officers  and  the  board  of  directors  put  together."^ 

What,  then,  is  the  background,  experience,  and  outlook  of 
men  who  commonly  hold  positions  on  the  boards  of  directors 
of  large  corporations?  Broadly  speaking,  they  are  men 
who  are  intensively  acquainted  with  questions  of  finance,  of 
investment,  of  credit,  of  banking  and  the  like,  but  not  men 
who  are  familiar  with  the  technology  of  production,  or  with 
the  deep  problems  of  labor  administration.  The  board  of 
directors  meets  as  a  whole  only  a  few  times  during  the  year, 
but  it  appoints  an  executive  committee  to  meet  oftener,  and 
to  decide  questions  which  do  not  demand  the  attention  of 
the  whole  board.  This  executive  committee  is  apt  to  be 
primarily  a  finance  committee.  As  stated  by  John  D.  Eocke- 
f  eller,  Jr., ' '  The  directors  attend  principally  to  the  financial 
affairs  of  the  corporation,  leaving  the  actual  conduct  of 
operations  to  the  officers.  ...  It  is  not  customary  to  sub- 
mit labor  policies  to  a  board  of  directors  for  action.  Con- 
ference regarding  them  is  often  had  with  the  directors  or 
executive  committee  at  the  instance  of  the  officers,  and 
suggestions  are  made  to  the  latter  by  both  these  bodies."^ 
Roger  W.  Babson  explains,  in  lengthy  testimony,  that 
"the  financial  interests  have  nothing  against  labor.  .  .  . 
But  it  is  indifference  with  them.  Their  job  is  to  get 
dividends  .  .  .  when  they  have  earned  dividends,  they 
consider  their  work  is  done. '  '*  Mr.  August  Belmont,  from 
active  experience  on  many  boards  of  directors,  declares, 
"A  director  rarely  has  to  do  with  labor  matters  in  a 
corporation  unless  by  chance  they  are  brought  to  his  at- 

1  "Federal  Commission  on  Industrial  Relations,"  Vol.  8,  pp. 
7660-7661. 

2 /bid.,  p.  7438.  3  76«z.,  p.  7764.  4  7b,v/.,  j,.  7455, 


248  Management:    Its  Technique 

tention  for  the  purpose  of  a  decision  as  to  the  merits  of 
something  that  may  bring  about  a  strike  or  something  as 
serious  as  that."  And  in  regard  to  making  inquiries  in  a 
given  corporation  about  wages,  hours,  unions,  and  working 
conditions,  he  explains,  "As  chairman  of  the  board,  that 
is  not  part  of  my  duty."^ 

Likewise,  matters  of  technology  of  production,  transpor- 
tation, or  processes  of  manufacture  are  foreign  to  the  atten- 
tion of  the  average  director.  This  separation  of  functions 
is  candidly  stated  by  Daniel  Guggenheim,  a  corporation 
figure  acquainted  with  the  practices  of  typical  corporations 
from  experience  and  first-hand  observation:  "Our  busi- 
ness as  regards  directors,  is  somewhat  different  from  al- 
most all  other  industrial  corporations  in  this  regard:  Of 
the  many  directors — we  have  over  20 — with  the  exception 
of  two  or  three  they  are  all  men  familiar  with  the  business, 
having  been  brought  up  in  the  business,  and  are  technical 
and  practical  smelting  men."^  This  distribution  of  duties 
and  functions  is  fundamental  in  an  understanding  of  cor- 
poration management.  It  was  the  testimony  of  experienced 
directors  of  corporations  before  the  Industrial  Commission 
that  most  directors  confine  their  attention  to  questions  of 
dividends,  credit,  and  finance,  and  this  can  be  done  from 
offices  in  the  big  financial  centers  of  the  country.  It  is 
for  this  reason  that  they  are  so  often  termed  "absentee 
directors."^  This  division  of  functions  has  the  advantage 
of  keeping  production  and  labor  matters  in  the  hands  of  the 
officers  on  the  ground,  but  this  very  factor  may,  and  often 
does  prove  a  disadvantage,  when  the  officers  in  charge  at  any 
plant,  hold  reactionary  views  about  labor,  and  are  stolidly 
ultra-conservative  in  treating  fundamental  production 
problems.* 

The  real  center  of  control  is  often  hard  to  find.  It  is 
not  located  in  the  hands  of  the  scattered  majority  of  stock- 
holders; it  is  not  evenly  distributed   among  the  several 

1  "Federal  Commission  on  Industrial  Relations,"  Vol.  8,  pp.  7547- 
7551. 
2/feM.,  p.    7561. 

s  See  testimony  of  Jacob  Sehiff,  ihid.,  Vol.  8.  p.  7523. 
4  On  this  whole  subject  see  also  pap;es  208-215  of  this  volume. 


Management:    Its  Technique  249 

directors.  Usually  there  is  some  dominating  interest  which 
openly  or  quietly  exerts  the  overshadowing  influence  in  the 
affairs  of  the  corporation.  But  in  not  a  few  cases,  a  search 
to  locate  the  real  power  in  the  affairs  of  the  corporation, 
would  lead  the  inquirer  to  conclude  that  the  real  governors 
of  the  corporation  are  undiscoverable.  Some  of  the  difficul- 
ties of  finding  the  real  center  of  power  will  become  appar- 
ent from  a  review  of  certain  basic  factors  connected  with 
the  organization  of  corporation  finance.  The  bondholders  of 
the  corporation  have  no  right  to  vote  for  directors.  They 
are  looked  upon  as  having  made  a  loan  to  the  corporation, 
and  in  their  status  as  creditors,  they  have  no  right  to  a  voice 
in  managing  its  affairs.  With  railroads,  and  some  of  the 
more  conservative  industrial  corporations,  bond  issues  may 
make  up  a  large  part,  in  many  cases,  the  greater  part  of  the 
total  financial  resources.  During  recent  years,  corporations 
'have  frequently  denied  voting  powers  to  the  preferred 
stockholders,  thus  putting  them  on  essentially  the  same 
footing  as  the  bond  creditors.  Voting  power  is  reserved 
for  the  holders  of  common  stock,  and  when  it  is  remembered 
that  this  represents  usually  good  will,  patents,  and  intan- 
gible assets  generally,  it  will  be  obvious  that  the  power 
centers  in  the  holders  of  a  controlling  fraction  of  the  com- 
mon stock.  The  owners  of  the  factory,  of  the  machinery, 
of  the  equipment,  of  the  raw  material,  and  of  tangible  prop- 
erty generally  are  the  bondholders  and  the  preferred  share- 
holders, but  these  owners  of  the  real  property  of  the  corpora- 
tion, in  an  increasing  number  of  cases,  have  no  voting 
powers.  Voting  powers  are  reserved  for  those  who  own 
that  part  of  the  capital  securities  which  represent  the  esti- 
mated value  of  trade  marks,  of  patents,  of  monopoly  ad- 
vantages, and  of  good  will  generally.  To  see  the  full  effect 
of  this  device,  it  is  necessary  to  observe  that  at  the  time 
of  the  promotion  and  formation  of  the  corporation,  it  is 
usual  for  the  banker  and  promoter  to  award  themselves 
a  substantial  block  of  common  stock  as  a  bonus  or  remunera- 
tion for  their  services  in  setting  up  the  corporation  as  a 
going  concern.  By  retaining  this  common  stock,  and  con- 
fining the  voting  power  to  the  common  stock  only,  they 


250  Management:    Its  Technique 

can  readily  retain  control  of  the  business  indefinitely.  In 
many  instances,  the  voting  power  is  given  to  both  the  pre- 
ferred and  common  share  holders,  but  the  amount  of  com- 
mon stock  issued  by  the  corporation  is  so  large  in  proportion 
to  the  preferred  issue  that  the  common  retains  control  of  the 
business.^ 

Another  factor  in  the  control  of  corporate  policy  is  found 
in  the  sj^stem  of  reorganizing  companies  which  go  through 
receivership  and  insolvency.  It  is  estimated  that  more  than 
one-half  of  the  railroads  of  this  country  have  at  one  time 
and  another  passed  through  the  hands  of  receivers,  and  a 
remarkably  large  number  of  industrial  corporations  have 
travelled  the  same  course.  Under  a  receivership,  a  bank 
is  called  in  to  rehabilitate  the  finances  of  the  corporation, 
and  commonly  a  voting  trust  is  established.  Under  the 
voting  trust,  the  stockholders  of  the  insolvent  corporation 
assign  to  a  committee  of  trustees  the  power  to  direct  the 
affairs  of  the  corporation,  at  least  until  such  time  as  it  shall 
again  be  on  an  efficient  basis.  This  committee  of  trustees 
is  under  the  control  of  the  bankers  who  are  reconstructing 
the  finances  of  the  corporation.  When  the  voting  trust  ex- 
pires, it  is  natural  for  the  bankers  to  desire  to  perpetuate 
the  solvency  of  the  corporation  and  to  make  certain  that 
its  affairs  are  not  conducted  again  in  such  a  way  as  to  re- 
peat the  bankruptcy.  The  only  way  of  accomplishing  this 
is  to  hold  an  influence  over  the  board  of  directors  of  the 
revived  corporation.  It  will  be  clear,  therefore,  that  both 
as  a  result  of  the  influence  of  bankers  in  starting  a  corpora- 
tion when  it  is  first  promoted,  and  as  a  result  of  their  inter- 
est in  perpetuating  their  influence  following  receivership 
and  reorganization,  the  bankers  tend  to  acquire  a  large  con- 
trol in  the  affairs  of  the  average  corporation,- 

More  than  this,  corporations  deliberately  seek  for  promi- 
nent bankers  to  appoint  to  their  boards  of  directors.  The 
board  needs  the  prestige  which  the  names  of  the  distin- 

1  See  A.  Dewing's  "Financial  Policy  of  Corporations,"  Volume  II, 
p.  47. 

2  On  this  matter,  see  the  testimony  of  Samuel  Untermyer  and  of 
Jacob  H.  Schiflf,  "Federal  Commission  on  Industrial  Relations," 
Volrune  8. 


Manage7nent:    Its  Technique  251 

guished  bankers  can  quickly  give,  and  many  of  the  direc- 
torate positions  of  bankers  exist  primarily  for  the  publicity 
value  which  they  carry.  Again,  it  is  important  that  a  cor- 
poration should  be  in  a  position  to  secure  at  all  times 
adequate  credit  to  carry  on  its  business,  and  banks  which 
have  representation  on  the  board  of  directors  are  supposedly 
more  ready  to  extend  credit  to  the  corporation.  Moreover, 
in  the  very  nature  of  corporation  finance,  the  stocks  or 
bonds  of  the  corporation  are  frequently  needed  as  a  col- 
lateral security  for  loans  made  from  the  banks.  The  stocks 
lose  their  value  for  security  purposes  unless  dividends  are 
kept  up.  The  stock  market  insists  that  dividends  be  forth- 
coming, and  the  bankers  who  are  in  charge  of  finances  are 
responsible  for  the  maintenance  of  dividends.  For  all  these 
reasons,  bankers  attain  to  a  pre-eminent  position  of  control 
or  influence  in  great  numbers  of  corporations. 

The  board  of  directors  is  likely,  therefore,  to  contain  peo- 
ple who  are  there  simply  for  good  looks'  sake  as  well  as 
those  who  are  there  to  assert  power.  Boards  of  directors 
contain  figureheads,  dummies,  puppets,  and  fashion  plates, 
and  they  know  their  bosses,  their  inside  interests,  their  lines 
of  pull.  Here  and  there  is  a  dominating  personality.  The 
government  of  a  corporation  is  not  essentially  different  from 
the  government  of  a  political  state.  There  is  what  Elihu 
Root  has  called  "the  invisible  government"  in  politics,  and 
the  same  thing  exists  in  business.  What  part  of  the  govern- 
ment of  the  corporation  is  visible  and  what  part  invisible 
will  vary  from  company  to  company,  and  the  invisible  gov- 
ernment may  be  just  as  efficient,  and  as  honorable  as  the 
visible.  It  is  true  as  a  general  rule,  however,  that  human 
nature  runs  to  questionable  policies  more  easily  under  con- 
ditions of  secrecy  than  under  conditions  of  publicity,  and 
this  human  tendency  underlies  much  of  the  speculative 
abuses,  and  corporation  wrongs  w^hich  have  been  the  theme 
of  muckraking.  All  of  these  considerations  serve  to  explain 
why  so  many  corporations  achieve  a  high  reputation  for 
safety  of  invested  capital  and  for  financial  efficiency,  and 
why  certain  other  corporations  find  it  possible  to  abuse  their 
opportunities. 


252  Management:    Its  Technique 

The  mechanism  of  management  below  the  board  of  direct- 
ors presents  new  aspects.  The  board  appoints  a  president 
and  certain  major  executive  officials,  who  in  turn  choose  the 
requisite  subordinates  and  assistants.  The  president  is  the 
great  co-ordinator  of  factors  in  the  business  organization, 
and  the  main  point  of  contact  between  the  business  plant 
and  the  board  of  directors.  There  are  certain  basic  manage- 
rial functions  which  have  to  be  sj^stematized  and  organized 
in  any  business,  but  the  methods  of  organization  are  by  no 
means  uniform.  The  basic  functions  of  any  active  business 
center  around  production,  finance,  accounting  and  sales, 
and  these  functions  require  on  the  executive  staif  a  pro- 
duction manager,  a  treasurer,  a  comptroller,  and  a  sales- 
manager. 

The  methods  of  delegating  responsibility,  of  dividing 
and  subdividing  functions,  and  of  fixing  authority  em- 
body many  variations  and  adaptations.  Until  recently, 
the  prevailing  method  was  the  ''line"  or  "military"  sys- 
tem of  organization.  Under  this  system,  business  was 
organized  on  the  basis  characteristic  of  former  armies. 
Each  official  was  in  charge  of  every  detail  within  a  certain 
jurisdiction,  and  he  was  obliged  to  be  familiar  with  all  de- 
tails, and  to  settle  all  problems.  The  foremen  and  the 
managers  had  to  be  all-around  men,  and  when  business 
grew,  and  the  technology  of  production,  sales,  finance  and 
accounting  become  so  immense  and  so  intricate,  no  one  man 
was  capable  of  mastering  all  of  the  details  and  settling  all 
the  problems  in  his  branch  of  the  plant.  Feeling  a  need  for 
expert  aid,  managers  developed  a  line  and  staff  organiza- 
tion, under  which  the  superintendents  and  foremen  drew 
advice  and  guidance  from  special  staffs  of  engineers, 
chemists,  accountants,  and  experts  of  every  description. 
Authority,  responsibility  and  function  were  still,  however, 
generalized  and  broad.  A  further  development  has  been 
the  departmental  type  of  organization,  under  which  special- 
ized functions  are  grouped  and  separate  foremen  are  placed 
in  charge  of  each  type  of  function.  This  is  a  step  in  the 
direction  of  outright  functional  management  under  which 
specialization  is  carried  to  an  extreme.     For  example,  a 


Management:    Its  Technique  253 

repair  boss  has  charge  of  all  repair  work,  a  route  clerk 
has  charge  of  all  planning,  a  speed  boss  is  responsible 
for  getting  the  work  completed  on  schedule  time,  and  so 
on.  Most  modern  businesses  conducted  on  a  large  scale 
combine  features  of  different  types  of  organization  in  an 
attempt  to  adapt  the  desirable  qualities  of  each  to  their 
peculiar  and  particular  problems.  Large  scale  production, 
with  its  increase  of  technical  complications  and  intricacies, 
has  led  to  greater  specialization  of  workmen,  foremen  and 
higher  officials,  and  this  intensive  specialization  of  func- 
tions is  one  of  the  most  important  developments  in  the 
methods  of  the  internal  organization  and  administration 
of  modern  business. 

Technique  of  Executive  Direction 

The  chief  executives  of  corporation  management  would 
obviously  have  found  the  direction  of  large  corporations  a 
mental  and  physical  impossibility  unless  they  could  have 
developed  in  the  meantime  a  technique  for  collecting  facts, 
interpreting  them,  formulating  policies  and  executing  them. 
Of  course,  the  methods  of  internal  organization  which  have 
just  been  described  were  a  part  of  this  new  technique.  But 
the  individual  executive  had  to  have  at  his  disposal  a  tech- 
nique which  would  enable  him  to  bring  the  immense  de- 
tail of  the  gigantic  business  within  the  scope  of  his  mind, 
in  such  a  shape  that  he  could  think  intelligently  about  the 
problems  to  be  solved. 

An  important,  part  of  this  technique  lies  in  the  science 
of  accountancy.  Accountancy  transforms  all  economic  fac- 
tors into  the  common  measuring  rod  of  money,  and  by 
means  of  this  common  and  universal  yardstick,  develops 
systematized  records  which  serve  as  the  basis  for  nearly 
all  important  business  judgments.  Accountancy  trans- 
lates all  of  the  assets,  multitudinous  in  their  variety,  into 
a  grand  total  of  dollars  and  cents;  and  all  of  the  liabilities 
likewise  into  a  grand  total  of  dollars  and  cents.  This  gives 
a  photograph  of  the  net  worth  of  the  corporation,  and  is 
an  essential  feature  of  virtually  all  negotiations  for  invest- 
ment or  commercial  credit  from  banks.    Accountancy  also 


254  Management:    Its  Technique 

translates  all  elements  of  the  conduct  of  the  business  into 
terms  of  money  expense  and  money  income  for  a  week,  a 
month  or  a  year,  and  supplies  thereby  a  profit  and  loss 
record  which  enables  executives  to  determine  readily 
whether  the  corporation  is  making  profits  or  running  be- 
hind. These  records  form  the  basis  for  the  corporation 
policy  in  declaring  dividends,  surplus  profits,  and  the  dis- 
position of  the  corporation's  net  income.  The  accountancy 
of  costs  furnishes  the  executive  with  the  pecuniary  facts 
bearing  on  the  cost  of  each  unit  of  production;  it  appor- 
tions the  relative  fractions  of  cost  due  to  labor,  to  rent,  to 
raw  material,  to  depreciation  of  machinery  and  equipment, 
and  to  every  factor  which  enters  into  the  business  process. 
Cost  figures  are  indispensable  in  the  estimation  of  selling 
prices,  for  otherwise  the  corporation  may  find  to  its  sorrow 
that  its  prices  are  below  expenses  of  doing  business.  The 
extreme  importance  of  cost  accounts  has  led  the  trade 
associations  which  now  exist  in  the  great  majority  of  busi- 
ness lines,  to  encourage  uniform  systems  of  cost  accounting 
among  their  members.  Uniform  cost  accounting  tends  to 
stabilize  prices,  and  to  alleviate  the  evils  of  cut-throat  com- 
petition. Exact  cost  accounts  make  possible  intelligent 
comparisons  between  different  parts  of  a  single  corpora- 
tion's operations,  and  between  the  operations  of  different 
corporations.  They  form  a  basis  for  discovery  of  the  effi- 
cient and  inefficient  parts  of  a  business,  and  a  necessary 
guide  in  formulating  policies  for  the  cheapening  of  the 
costs  of  doing  business.^  The  data  of  accounting  are  pri- 
mary necessities  iri  the  directive  thinking  of  executives. 

A  facility  for  collecting  the  proper  facts  and  for  digest- 
ing the  records  presented  by  accountants  characterizes 
great  executive  ability  in  the  modern  large  corporation. 
With  the  facts  in  mind,  the  executive  devotes  the  major 
part  of  his  mental  effort  to  the  formulation  of  the  broad 
problems  of  business  policy.  He  is  successful  to  the  extent 
that  he  can  place  minor  problems  on  the  backs  of  minor 

iSee  A.  Marshall's  "Industry  and  Trade,"  pp.  3G6-371,  also 
Gerstenberg's  "Principles  of  Business,"  Chapters  XXIX,  XXX,  and 
XXXI. 


Management:    Its  Technique  255 

officials,  keep  routine  duties  in  the  hands  of  assistants, 
maintain  adequate  sources  of  information,  and  free  him- 
self for  concentration  upon  the  essential,  fundamental 
issues  of  the  business.  Co-ordinate  with  this  executive 
trait  is  the  ability  to  preserve  throughout  the  channels  of 
subordinate  administration  a  fluency  and  openness  such 
that  his  decisions,  his  personality,  the  force  of  his  mind  and 
character  shall  penetrate  to  the  very  perimeter  of  the  busi- 
ness. The  whole  structure  of  management  must  serve  as 
a  conductor  for  both  the  technical  decision  and  the  human 
spirit  of  the  man  at  the  top.  Studies  that  have  been  made 
of  the  dominant  powers,  traits  and  habits  of  the  greatest 
modern  business  executives  indicate  that  the  executive 
ability  to  direct  the  largest  corporate  activities  involves 
great  physical  vitality,  unflagging  mental  activity,  superior 
judgment  in  the  selection  and  placing  of  men,  the  inspir- 
ing personality  of  marked  leadership,  fearlessness  in  the 
face  of  huge  risks,  accuracy  in  forecasting  the  business 
conditions  of  the  future,  and  a  genuine  statesmanship  in 
making  all  things  fall  into  their  proper  places,  and  all  parts 
of  the  business  fit  into  the  economic  and  social  structure 
harmoniously.  After  all  is  said  and  done,  the  technique 
of  administration,  and  the  science  of  facts  and  policies,  is 
just  about  what  the  psychology  of  the  chief  executive  makes 
of  it  all.  His  dominating  motives,  his  paramount  instincts, 
his  emotional  peculiarities,  his  level  and  type  of  intelli- 
gence, and  the  whole  human  force  of  his  original  nature 
will  adapt  managerial  technique  in  countless  ways.^ 

Such  a  description  presents  management  in  its  most 
laudatory  phases.  It  is  true  to  the  facts  of  the  case  in 
a  great  number  of  instances,  but  it  is  not  the  whole  of  the 
picture.  For  with  all  of  the  developments  in  the  technique 
of  administration,  with  the  aid  of  modern  accountancy  and 
the  use  of  modern  statistics,  with  the  experience  of  success- 
ful executives  to  draw  upon  and  with  the  principles  of  ef- 
ficient business  government  carefully  worked  out,  it  never- 
theless remains  a  startling  fact  that  most  production  en- 

1  See,  for  instance,  B.  C.  Forbes's  "Men  Who  Are  Making  America," 
and  J.  G.  Frederick,  "Business  Research  and  Statistics." 


256  Management:    Its  Technique 

gineers,  consulting  engineers,  experts  in  the  science  of 
management,  and  trained  scientific  managers  agree  that  the 
bulk  of  business  to-day  is  grossly  inefficient.  This  con- 
viction appears  to  be  held  by  the  conservative,  sober 
minded,  reliable  engineers  of  the  country.  In  their  judg- 
ment, the  average  business  would  be  able  to  increase  its  ef- 
ficiency by  from  25  to  50  per  cent,  by  the  application  of 
known  and  tried  principles  and  practices  of  management. 
Industry  abounds  with  immense  wastes  and  losses  and  un- 
realized efficiency  because  of  the  unwillingness  of  managers 
to  abandon  traditional  methods  of  management,  and  be- 
cause of  their  frequent  inability  to  adapt  their  own  psychol- 
ogy to  the  necessities  of  modern  managerial  technique.^ 

The  most  authoritative  single  statement  of  the  facts 
about  the  inefficiencies  of  many  parts  of  business  manage- 
ment is  contained  in  a  report  presented  in  1921  by  a  Com- 
mittee on  the  Elimination  of  Waste  representing  the  Fed- 
erated American  Engineering  Societies.  The  committee 
was  appointed  under  the  direction  of  Herbert  Hoover,  and 
its  investigations  were  conducted  by  the  aid  of  a  staff 
of  fifty  engineers.  Their  investigations  covered  directly 
1125  separate  plants,  divided  between  the  building  industry, 
men's  ready  made  clothing  manufacturing,  boot  and  shoe 
manufacturing,  printing,  the  metal  trades,  and  textile 
manufacturing.  Four  basic  causes  of  waste  and  ineffi- 
ciency were  found : 

"1.  Low  production  caused  by  faulty  management  of 
materials,  plant,  equipment  and  men; 

"2.  Interrupted  production  caused  by  idle  men,  idle  ma- 
terials, idle  plants,  idle  equipment; 

"3.  Kestricted  production  caused  by  management  or 
labor ; 

"4.  Lost  production  caused  by  ill  health,  physical  de- 
fects and  industrial  accidents." 

In  the  judgment  of  the  committee,  the  waste  and  inef- 
ficiency   is   due    overwhelmingly   to   the    shortcomings    of 

iSee  B.  C.  Thompson,  "Scientific  Management:"  H.  L.  Gantt, 
"Organizing  for  Work;"  Emerson,  "Principles  of  EflSciency;"  F.  W. 
Taylor,  "Principlea  of  Scientific  Management." 


Management:    Its  Technique  257 

management.  These  shortcomings  mainly  take  the  form  of 
a  failure  to  utilize  and  apply  tried  and  proven  principles 
of  administration  and  technique  of  management  already  in 
existence.  The  conservatism  and  inertia  of  management 
are  primary  causes.  The  body  of  scientific  principles  al- 
ready successfully  applied  in  pioneer  and  progressive 
plants  are  available  but  unused.  Some  indication  of  the 
extent  of  loss  and  waste  from  managerial  inefficiency  is 
given  by  the  following  detailed  findings  of  the  committee : 
Faulty  planning  of  material  caused  labor  engaged  in  shoe 
production  to  be  idle  more  than  35  per  cent,  of  the  time. 
Faulty  planning  of  work  by  management  caused  a  loss  of 
one-third  during  the  normal  operation  of  clothing  fac- 
tories. Proper  organization  of  the  men's  ready-made  cloth- 
ing industry  should  bring  ''an  increase  of  40  per  cent,  in 
effectiveness."  In  the  printing  plants  of  New  York  City, 
less  than  one-fifth  of  the  plants  had  any  system  of  cost  ac- 
counting; the  other  four-fifths  lost  money  during  1919. 
The  metal  trades  were  operating  at  about  60  per  cent,  of 
normal  output,  and  the  value  of  their  increased  possible 
production  in  normal  times  would,  according  to  the  esti- 
mate, exceed  half  a  billion  dollars.  Labor  turnover  was 
found  to  be  needlessly  high,  and  few  factories  were  taking 
advantage  of  any  personnel  system  to  reduce  the  conse- 
quent loss.  The  manufacturing  equipment  in  clothing, 
printing,  and  shoe  manufacturing  is  about  double  the  real 
needs  of  the  country  in  those  lines  of  production.  Sea- 
sonal employment  means  that  in  clothing  manufacturing, 
the  worker  is  idle  about  31  per  cent,  of  the  year,  in  shoe 
making,  35  per  cent.,  in  building  trades  37  per  cent.  The 
above  are  only  a  few  typical  illustrations,  but  they  serve 
to  indicate  the  enormous  waste  in  economic  organization 
due  mainly  to  the  failure  of  a  large  proportion  of  manage- 
ment to  accept  and  apply  the  developments  in  modern 
technology  of  production  and  in  the  science  of  human  ad- 
ministration. 

Management  is,  therefore,  neither  always  efficient  nor 
always  wasteful.  The  progressive,  scientific  management 
at  its  best  is  a  marvel  of  economy,  harmony,  and  efficiency ; 


258  Management:    Its  Technique 

but  the  traditional  unscientific  management  which  still 
has  a  strong  grip  on  wide  stretches  of  industry  is  far  from 
efficient.  The  directions  of  evohition  are  decidedly  toward 
the  adoption  of  the  improved  and  modern  methods  of  pro- 
duction efficiency.  At  times  the  progress  made  by  the  bulk 
of  managers  is  tediously  gradual,  but  the  important  feature 
of  the  situation  is  the  fact  that  a  body  of  scientific  prin- 
ciples of  efficiency  is  already  in  existence,  that  the  condi- 
tions of  inefficiency  are  known  and  revealed,  and  that 
organized  effort  is  being  made  to  bring  all  management  up 
to  the  better  standards. 

Business  Combination  and  Concentration  o£ 
Management 

The  proportions  of  the  task  of  modern  management  are 
augmented  by  the  very  fact  of  the  concentration  of  busi- 
ness through  corporations,  holding  companies,  trusts, 
mergers,  and  amalgamations.  The  extent  of  the  combina- 
tion movement  was  explained  in  some  detail  at  the  be- 
ginning of  this  chapter.  The  present  analysis  has  to  do 
with  the  reasons  for  the  combination  movement,  the  results 
of  it,  and  its  fundamental  implications  for  the  economic 
and  social  system. 

Reasons  for  the  Combination  Movement 

The  jjaramount  force  in  breaking  the  bonds  of  inertia, 
and  driving  business  organization  out  upon  the  untried  and 
adventuresome  paths  of  combination  was  the  menace  of  cut- 
throat competition.  Toward  the  latter  part  of  the  nine- 
teenth century,  the  adage  that  competition  is  the  life  of 
trade  lost  its  meaning  in  a  great  many  l)ranehes  of  business, 
and  it  was  discovered  that  competition  carried  to  an  ex- 
treme was  the  death  of  trade.  Corporations  engaged  in 
desperate  price  wars  in  the  determination  to  take  trade  away 
from  each  other,  with  the  result  that  an  appalling  number 
of  failures  occurred.  In  the  sugar  industry,  out  of  a  total 
of  40  large  competing  refineries,  18  went  into  bankruptcy 
in  the  three-year  period  from  1885  to  1887.  The  inves- 
tigation of  the  general  movement  toward  combination  in 


Management:    Its  Technique  259 

American  industry  by  a  Federal  Industrial  Commission  in 
1900  led  to  the  conclusion  that  "among  the  causes  which 
have  led  to  the  formation  of  industrial  combinations,  .  .  . 
competition,  so  common,  so  vigorous,  that  nearly  all  com- 
peting establishments  Avere  destroyed,  was  to  be  given 
first  place."  Even  where  competition  did  not  have  so 
destructive  a  consequence,  it  usually  forced  drastic  reduc- 
tions in  profits,  and  raised  the  hazards  of  business  to  the 
maximum.  The  compelling,  djaiamic  force  behind  the 
combination  movement  w^as  the  menace  of  a  competition 
"which  threatened  ruin  to  hundreds  of  business  corpora- 
tions. Combination  was  a  life-saving  endeavor.  It  was  not 
entered  into  to  satisfy  the  ambitions  of  idle  dreamers,  nor 
would  it  have  been  undertaken  on  so  vast  a  scale  merely 
in  the  hope  of  realizing  superior  gains.  The  "driving 
forces"  which  budged  things,  and  put  the  original  vitality 
into  the  combination  movement  were  the  dangers  of  de- 
structive, cutthroat  competition.  Combination  was  the 
only  available  means  of  self-preservation  on  a  safe  and 
profitable  footing.^ 

When  the  minds  of  the  leading  business  organizers  be- 
gan to  take  account  of  the  details  of  the  situation,  it  ap- 
peared to  them  that  combination  would  not  merely  perform 
the  life-saving  function,  but  would  in  addition  give  to  the 
business  organizations  distinct  advantages  in  production 
and  trade  which  would  be  measured  by  an  imposing  increase 
in  profits  and  dividends.  The  suppression  of  damaging 
competition,  and  the  creation  of  the  economies  and  advan- 
tages of  large  scale  management  were  the  two  prime  influ- 
ences behind  the  combination  movement.  Comjbination 
was  looked  upon  as  a  course  of  action  which  would  not 
only  save  the  lives  of  competitors,  but  also  would  bring  in 
rich  profits  for  the  combiners. 

The  anticipated  economies  and  advantages  were  various. 
The  number  of  salesmen  could  be  substantially  cut  down, 
because  under  the  combination  one  salesman  could  repre- 
sent the  big  business  unit,  approaching  prospective  buyers 

1 L.  H.  Haney,  "Business  Organization  and  Combination,"  pp. 
134-136. 


260  Management:    Its  Technique 

with  samples  and  selling  talk,  whereas  formerly  each  sepa- 
rate small  company  sent  out  its  own  salesmen.  With 
many  companies  anxious  to  secure  the  same  order,  there 
was  much  duplication,  and  endless  overlapping  of  effort. 
Advertising  expenses  could  be  reduced,  because  a  host  of 
small  competing  corporations  devoted  large  sums  to  taking 
trade  away  from  each  other  by  lavish  use  of  advertising 
space.  Labor  unions  could  be  held  under  restraint  more 
effectually  because  individual  corporations  stood  almost 
helpless  before  the  concerted  strength  of  a  national  union 
threatening  a  strike  to  enforce  labor  demands.  Large  pro- 
ducers could  afford  full  time  use  of  very  expensive  ma- 
chinery, the  most  efficient  labor-saving  devices,  and  forms 
of  equipment  which  it  would  not  pay  to  use  in  small  plants. 

The  large  business  organization  could  place  itself  in  a 
fairly  secure  and  stable  position  by  vertical  integration. 
For  example,  the  International  Harvester  Company  could 
have  not  merely  plants  for  the  manufacture  of  farm  imple- 
ments, but  also  its  own  coal  mines,  its  own  iron  and  steel 
plants,  and  even  in  some  districts,  its  own  railroad  equip- 
ment; or,  the  United  States  Steel  Corporation  could  own 
mines,  mills,  railroads,  and  ships.  Saving  in  freight  would 
be  effected,  because  the  combination  would  have  plants  lo- 
cated at  various  points  the  country  over,  and  could  ship  to 
the  buyer  always  from  the  nearest  factory,  thereby  eliminat- 
ing the  "cross-freights"  which  prevailed  when  the  scattered 
plants  were  under  sharp  competition.  The  combination 
could  bring  greater  pressure  to  bear  in  the  collection  of 
debts,  and  would  not  be  obliged  to  make  risky  extensions  of 
credit  as  under  the  days  of  severe  competition  when  it  was 
necessary  to  make  shaky  credit  concessions  to  buyers  in 
order  to  curry  trade.  The  concentrated  plant  could  carry 
a  larger  variety  of  lines  and  grades  of  goods  to  satisfy  the 
whims  and  desires  of  all  classes  of  customers,  and  could 
carry  a  stock  large  enough  so  that  orders  could  be  filled 
immediately,  thus  avoiding  delays  provoking  to  customers. 

Large  producers  could  make  full  utilization  of  by-prod- 
ucts, and  in  many  lines  of  production,  the  value  of  the 
by-products  makes  the  difference  between  profit  and  loss. 


Management:    Its  Technique  261 

Large  industrial  concerns  would  be  able  to  maintain  labora- 
tories and  departments  for  commercial  research  to  advance 
the  technology  of  production,  and  would  be  able  to  adopt 
promptly  improvements  and  discoveries  in  the  processes 
of  manufacture.  The  big  concern  could  buy  in  large 
quantities  and  secure  inside  prices  and  special  discounts. 
It  could  secure  better  credit  accommodations  from  the  banks, 
and  could  afford  to  employ  a  superior  grade  of  managers, 
engineers,  efficiency  experts,  superintendents  and  the  like. 
Output  could  be  better  regulated  to  avoid  over-production 
in  dull  times,  and  under-production  in  boom  times.  Com- 
bination would  give  to  all  the  member  companies  the  ad- 
vantages of  the  patents,  secret  processes,  trade  marks,  and 
brands  which  formerly  had  been  jealously  guarded  by  each 
individual  company  from  its  rivals.  Large  business  or- 
ganization would  be  able  to  bring  to  bear  at  least  a  partial 
monopoly  advantage  in  price  determination,  and  would 
therefore  be  able  to  reap  profits  in  excess  of  any  that  could 
be  obtained  by  independent  corporations.  Net  earnings 
would  be  materially  enhanced  by  the  economies  in  produc- 
tion and  distribution  on  the  one  hand  and  the  influence 
over  prices  on  the  other. 

These  advantages  of  combination  would  probably  never 
have  made  the  strong  appeal  to  the  minds  of  business  men 
which  was  necessary  to  launch  the  great  combination 
movement  had  it  not  been  for  the  fact  that  certain  inter- 
ested parties,  promoters,  took  it  upon  themselves  to  "sell" 
the  combination  idea  to  the  bankers,  the  investing  public, 
the  boards  of  directors,  the  owners,  and  all  parties  con- 
cerned. It  has  been  repeatedly  stated  by  economic  students 
that  all  business  combinations  owe  their  existence  to  the 
constructive  imagination  and  irresistible  initiative  of  some 
one  man,  or  some  very  small  group  of  men.  Business 
combinations  do  not  come  into  being  without  creative  ef- 
fort on  the  part  of  somebody,  and  in  the  business  w^orld 
there  are  certain  individuals  who  specialize  in  the  promo- 
tion of  corporate  combinations.  Often  they  are  profes- 
sional promoters  whose  special  life  work  is  conceiving  and 
executing  first  one  business  adventure  and  then  another. 


262  Management:    Its  Technique 

The  promoter  may  be  a  man  of  successful  manufacturing 
experience,  or  an  engineer,  or  a  railroad  executive.  He 
may  be  actively  engaged  in  a  part  of  the  business  which 
he  hopes  to  make  a  part  of  the  eventual  combination,  or 
he  may  be  a  total  outsider.  Whatever  his  origin,  he  per- 
forms certain  vital  and  indispensable  functions.  His  mind 
originates  and  grasps  the  idea  of  the  possibilities  of  the 
new  business  organization.  The  promoter  is  an  inventor  of 
a  new  business  plan,  of  a  new  corporation  project.  The 
promoter  has  the  distinctive  psychological  makeup  which 
asserts  itself  in  the  instinct  of  constructiveness,  and  the 
love  of  creative,  original  achievement.  He  has  unbounded 
originality,  a  power  of  vision,  a  prophetic  judgment  of  the 
future,  and  a  delight  in  setting  out  upon  new  and  moment- 
ous adventures.  Were  it  not  for  this  type  of  personality, 
many  of  the  most  significant  combinations  would  never 
be  born. 

But  this  is  only  the  first  stage  of  the  promoter's  task. 
He  must  acquire  a  mass  of  statistical  data,  of  financial 
evidence,  of  technical  facts  about  production  and  mar- 
keting, and  must  fully  acquaint  himself  with  the  basic 
policies  of  the  branch  of  industry  in  which  the  com- 
bination is  anticipated.  From  these  facts,  the  promoter 
is  able  to  explain  convincingly  the  economies  and  advan- 
tages that  will  accrue  from  the  new  combination.  It  is 
necessary,  also,  to  interest  bankers  in  the  project,  and  to 
evolve  a  financial  plan  for  the  capitalization  of  the  com- 
pany, and  for  the  sale  of  security  issues.  The  bankers 
undertake  the  execution  of  the  financial  part  of  the  venture 
usually  through  the  formation  of  a  syndicate  of  bankers 
to  underwrite  the  stock  issues  of  the  new  corporation.  The 
syndicate  of  bankers  thus  accepts  the  responsibility  of  mar- 
keting the  securities  of  the  undertaking.  The  promoter 
has  to  persuade  the  owners  and  controlling  powers  in  the 
separate  companies  to  sell  their  properties,  and  this  step 
is  attempted  through  the  securing  of  options  giving  the 
promoting  interests  the  right  to  buy  the  properties  at 
stated  prices  within  stated  periods  of  time.  The  promoter 
must  have  available  satisfactory  estimates  of  the  probable 


Management:    Its  Technique  263 

earnings  of  the  new  company,  and  must  be  able  to  point 
out  how  and  why  these  will  almost  surely  exceed  the  col- 
lective earnings  of  the  separate  independent  companies. 
To  the  owners  of  companies  which  have  been  suffering 
already  from  the  thrusts  of  cut-throat  competition,  the  op- 
portunity to  sell  and  to  save  their  fortunes  is  most  welcome. 
In  other  cases,  intensive  urging  and  much  persuasive  power 
has  been  necessary,  and  even  coercion  must  at  times  be 
resorted  to. 

In  order  to  carry  through  these  difficult  achievements, 
the  promoter  must  be  a  party  who  commands  the  con- 
fidence of  the  people  whom  he  is  trying  to  combine.  The 
promoter's  task  is  "one  that  requires  the  very  highest  intel- 
ligence, and,  as  a  rule,  neutral  parties — parties  not  inter- 
ested, men  of  the  intelligence  and  reputations  to  inspire 
unlimited  confidence  on  the  part  of  manufacturers,  are 
needed  to  bring  manufacturers  together,"^  The  promoter 
performs  a  specialized  function  of  the  utmost 'importance, 
because  any  number  of  the  most  effective  business  combina- 
tions could  not  come  about  merely  as  a  result  of  the  natural 
forces  of  economic  life,  or  of  the  menace  of  sharp  competi- 
tion. Someone  has  to  take  the  initiative  in  overcoming  the 
jealousies  of  men  who  have  been  desperate  rivals  for  years; 
someone  has  to  allay  the  skepticism  which  springs  up  at 
the  suggestion  of  a  new  adventure,  and  to  lift  men  out  of 
the  inertia  and  lethargy  which  exists  everywhere.  For  this 
service  to  the  economic  community,  the  promoter  exacts 
a  profit,  commonly  in  the  form  of  a  bonus  of  the  common 
stock.  His  work  is  extremely  precarious,  and  he  is  as  likely 
to  fail  as  to  succeed.  In  the  successful  promotions,  the 
promoter  usually  charges  all  that  the  traffic  will  bear,  and 
secures  an  appropriation  of  common  stock  which  is  gen- 
erous to  say  the  least.^ 

Successes  and  Failures  in  Combination 

It  is  difficult  to  measure  with  exactness  the  extent  to 

which   the   combinations   formed   under   these    conditions 

1  Meade,  "Corporation  Finance,  Testimony  of  Mr.   Flint,"  p.  30. 
-Ibid.,  pp.  21,  38,  39.     See,  also,  Dewing's  "Corporate  Promotions 
and  Reorganizations,"  Chapter  XX. 


264  Management:    Its  Technique 

have  realized  the  economies  and  advantages  which  were 
claimed  for  them.  In  so  far  as  they  aimed  at  the  suppres- 
sion of  competition,  they  of  course  put  an  end  to  competi- 
tion between  the  companies  which  came  into  the  consolida- 
tions. However,  they  found  themselves  face  to  face  with  a 
new  competition  in  which  the  competing  units  were  bigger. 
Even  at  the  time  of  formation,  it  appears  that  the  majority 
of  the  combinations  controlled  less  than  50  per  cent,  of  the 
production  in  their  respective  lines  of  industry.  It  was 
comparatively  rare  for  a  combination  to  control  more  than 
75  per  cent,  of  the  product.  The  hopes  of  optimistic  pro- 
moters and  the  dreams  of  corporation  executives  for  a 
domination  of  the  market  and  a  control  of  a  given  branch 
of  industry  were  scarcely  ever  fully  realized.  Many  of  the 
combinations  which  started  out  with  the  highest  percent- 
age of  control  have  experienced  a  marked  shrinkage  of  their 
percentage  in  recent  years.  For  instance,  during  its  first 
years,  the  American  Sugar  Kefining  Company  refined  from 
80  to  90  per  cent,  of  the  sugar  refined  in  the  United  States, 
but  by  1921,  its  percentage  of  the  total  output  had  fallen 
to  about  24  per  cent.  And  the  United  States  Steel  Cor- 
poration, from  making  50.1  per  cent,  of  the  nation's  iron 
and  steel  output  in  1901  declined  to  45.7  per  cent,  in  1911. 
And  yet,  although  competition  was  not  suppressed  by  the 
large  combinations,  the  more  dangerous  and  destructive 
phases  of  competition  were  brought  under  restraint  and 
control  considerably;  and  in  the  new  era,  large  combina- 
tions were  decidedly  better  able  to  protect  themselves  from 
the  worst  features  of  cut-throat  competition.  The  inef- 
ficiencies of  many  over-sized  consolidations,  the  anti-trust 
decisions  of  state  and  federal  courts,  and  the  governmental 
prohibitions  of  unfair  competitive  methods,  have  been 
causes  behind  the  failure  of  so  many  combinations  to  realize 
in  full  their  original  hopes  for  the  suppression  of  com- 
petition. 

The  degree  of  success  in  so  far  as  the  expectation  of 
increased  net  earnings  was  concerned  met  with  similar 
limitations.  Individual  combinations  here  and  there  did 
earn  impressive  dividends.     The  oil,  sugar,  tobacco  and 


Management:    Its  Technique  265 

steel  consolidations  were  famous  for  their  large  earnings. 
The  sensational  earnings  of  certain  combinations  received 
much  publicity,  and  so  gave  rise  to  the  popular  belief  that 
practically  all  combinations  were  gaining  luxurious  profits. 
The  true  facts  of  the  case  are  carefully  summarized  by 
H.  R,  Seager:  "Of  the  183  industrial  combinations  in- 
vestigated by  the  Census  Bureau  in  1900,  but  121  had  paid 
dividends.  .  .  .  One-third  of  the  total  number  paid  no 
dividends  at  all  and  another  one-third  paid  no  dividends 
to  common  stock  holders.  Nor  has  this  showing  been 
greatly  improved  in  the  years  that  have  elapsed  since 
1900.  An  intensive  study  of  the  thirty  largest  trusts 
which  were  organized  prior  to  January  1,  1904,  shows  that, 
while  eight  have  been  phenomenally  successful,  and  seven 
moderately  successful,  ten  have  proved  unsuccessful  and 
five  have  been  disastrous  failures."^  The  combination 
movement  fell  far  short  of  its  hopes  and  promises.  The 
anticipated  economies  too  often  proved  to  be  illusions,  and 
the  advantages  of  large  scale  production  which  had  loomed 
so  attractively  in  the  arguments  of  promoters  proved  to  be 
offset  time  and  again  by  even  greater  handicaps  and  dis- 
advantagep  arising  from  unwieldiness  and  overgrowth.  The 
history  of  the  combination  movement,  in  all  its  ups  and 
downs,  teaches  pre-eminently  one  economic  lesson  of  the 
greatest  significance,  namely,  that  the  economies  and  ad- 
vantages of  large  scale  business  tend  to  disappear  after 
the  business  unit  gets  beyond  a  certain  size.  A  point  is 
reached  beyond  which  the  economies  and  advantages  are 
displaced  by  wastes,  inefficiencies  and  disadvantages  of  the 
severest  sort.  The  size  of  maximum  advantage  and  econ- 
omy varies  from  industry  to  industry  and  from  decade  to 
decade,  owing  to  changes  in  the  state  of  the  industrial 
arts  and  sciences. 

In  a  broad  way,  those  industries  will  bear  the  largest 
size  of  business  unit  which  can  most  thoroughly  substitute 
mechanical  processes  for  the  workmanship  of  human  beings. 
Industries  whose  processes  can  be  standardized,  in  which 

1  "Principles  of  Economics,"  1017,  pp.  455-456.  Seo,  also,  A.  S. 
Dewing,  Quarterly  Journal  of  Economics,  Vol.  36,  pp.  84-102. 


266  Management:    Its  Technique 

automatic  and  semi-automatic  machinery  can  be  utilized, 
in  which  mechanical  conveying  and  transporting  and  hoist- 
ing can  be  taken  advantage  of,  and  in  which  the  human 
element  can  be  reduced  to  a  subordinate  importance,  realize 
the  economies  of  large  scale  production.  As  the  mechani- 
cal technology  advances  in  a  branch  of  industry,  and 
methods  of  standardization  are  improved,  the  way  is  paved 
for  large  units  of  business  organization.  To  the  extent 
that  labor  is  involved  in  such  highly  developed  mechani- 
cal processes,  its  efficiency  is  substantially  regulated  by  the 
necessity  for  keeping  up  with  the  machine.  In  the  meat 
packing  plants,  for  example,  the  animal  is  conveyed  by 
machinery  past  the  worker,  and  it  is  necessary  for  him  to 
perform  some  narrow,  specialized  act,  completely,  while 
the  animal  is  traveling  in  front  of  him.  The  speed  of  the 
carrying  machinery  thus  regulates  the  speed  of  the  worker. 
The  same  is  true  of  the  processes  of  standardized  automo- 
bile manufacture,  and  in  any  number  of  other  industrial 
branches.  In  lines  of  production  where  definite  regulation 
of  the  worker's  speed  by  the  mechanical  processes  is  not  so 
fully  possible,  it  is  important  to  note  that  even  if  the 
worker  is  inefficient,  his  labor  is  a  minor  part  of  produc- 
tion cost. 

However,  the  possibility  of  large  scale  economies  is 
sharply  reduced  where  skill,  workmanship,  personal  in- 
terest, and  individual  devotion  to  duty  are  a  major  part 
of  the  business  process.  The  large  company  loses  the  hu- 
man touch  with  the  workers.  Workers  come  to  think  of 
the  executive  officials  often  as  remote  and  mysterious 
powers,  interested  solely  in  grinding  out  maximum  profits, 
and  the  psychological  reaction  is  sulkiness,  indifference  to 
work,  disloyalty  to  the  company,  and  personal  inefficiency. 
Combinations  of  industry  have  found  it  exceedingly  dif- 
ficult to  avoid  diminishing  labor  efficiency  under  increasing 
industrial  size.  The  human  factor  has  stubbornly  resisted 
efforts  at  standardization,  and  the  failure  of  the  original 
promoters  of  the  great  combinations  to  take  into  account 
this  basic  psychological  element  explains  in  large  measure 
the  repeated  disappointments  in  the  efficiency  of  the  com- 


Management:    Its  Technique  267 

binations.  Primarily  for  the  reasons  that,  human  factors 
play  a  dominant  part  in  their  processes  of  production,  the 
cotton  manufacturing  industry  and  the  men's  and  women's 
clothing  manufacturing  industry  have  not  been  brought 
under  the  regime  of  concentrated  production. 

It  is  also  true  that  in  those  branches  of  industry  where 
standardized  mechanical  processes  can  be  drawn  upon,  the 
independent  corporation  may  secure  substantially  as  great 
efficiency  as  the  enormous  combination.  In  such  indus- 
tries there  is  no  insurmountable  difficulty  to  the  attain- 
ment of  efficiency  under  the  large  organization,  but,  on  the 
other  hand,  the  gigantic  organization  is  not  necessary  for 
the  attainment  of  maximum  efficiency.  Reasonably  strong 
independent  companies  can  install  the  mechanical  equip- 
ment as  well  as  the  huge  companies,  and  can  realize  in  good 
measure  similar  economies.  Gigantic  combination  in  such 
lines  of  industry  is  not  an  essential  condition  of  the  great- 
est efficiency. 

The  greatest  single  snag  in  the  way  of  large  scale  enter- 
prise is  a  psychological  one.  For  one  thing,  it  is  next  to 
impossible  to  find  leaders  with  the  instinctive  and  mental 
equipment  adequate  to  direct  the  large  undertakings.  The 
captains  of  industry  of  one  generation  must  be  superseded 
by  new  captains  in  the  succeeding  generation,  and  busi- 
ness organizations  suffer  from  a  dearth  of  the  very  best 
managerial  ability.  The  salaries  offered  range  from  $15,000 
to  more  than  $100,000  a  year,  and  the  positions  carry  such 
power  and  prestige  that  they  are  coveted  intensely  by 
the  leading  men  of  the  country.  But  there  is  a  limit  to 
the  tasks  which  even  the  best  brains  can  master,  and  there 
is  a  very  narrow  limit,  very  commonly  lamented  by  boards 
of  directors  in  search  of  executives,  to  the  supply  of  the 
best  brains.^  A  billion  dollar  corporation  entails  problems 
of  administration  and  control  which  only  the  rarest  exec- 
utives can  solve  effectively. 

The  large  combinations  embody  a  dozen,  or  a  score,  or  a 

1  See  A.  Marshall's  "Industry  and  Trade,"  pp.  .300-364 ;  Stevens's 
"Industrial  Combinations  and  Trusts,"  pp.  574-575;  Brown's  "Selec- 
tion  and   Training   of    Executives,"    pp.    1-46    and    Introductioiu 


268  Manage7nent:    Its  Technique 

hundred  or  more  separate  plants,  scattered  across  the  coun- 
try. Each  subsidiary  plant  must  have  executive  officials 
of  high  ability,  and  it  is  no  small  task  to  inspire  a  small 
army  of  subordinate  officials,  with  whom  the  president 
over  all  is  seldom  in  personal  contact.  The  various  sub- 
ordinates have  to  be  infused  with  the  spirit  of  the  head 
of  the  combination,  have  to  understand  the  application 
of  the  broad  policies  and  basic  ideas  which  he  desires  to 
have  worked  out  in  the  several  plants,  have  to  be  made  to 
feel  a  keen  sense  of  responsibility  and  loyalty  to  the  com- 
bination. "When  the  managers  of  the  various  plants  do  not 
have  their  own  money  tied  up  in  the  property,  there  is 
a  double  difficulty  in  leading  them  to  devote  their  best 
energy  and  ability  to  their  position.  They  do  not  plunge 
into  the  task  with  all  their  strength  as  they  might  if  the 
business  were  their  own.  Especially  are  they  apt  to  as- 
sign the  burdensome,  tedious,  aggravating  parts  of  the  posi- 
tion to  others,  and  to  neglect  the  drudgeries  which  might 
not  eeem  so  onerous  if  the  plant  actually  belonged  to  the 
manager,  and  all  the  pride  of  personal  fortune  were  at 
stake.  In  cases  of  independent  corporations,  of  the  small 
or  moderate  sized  variety,  no  amount  of  plugging,  no 
amount  of  indefatigable,  painstaking  effort  is  too  great  for 
the  taste  of  the  men  whose  all  is  at  stake  in  success  or  fail- 
ure. The  modern  president  must  be  able  to  create  morale 
among  his  subordinate  executives,  and  in  the  largest  busi- 
ness organizations,  this  possibility  is  strained  to  the  break- 
ing point.  Big  business  is  a  question  of  the  best  motives 
of  the  biggest  men  in  the  country.  And  the  problem  of 
bringing  forth  the  best  psychological  powers  of  executives, 
yet  not  overstraining  the  human  equipment;  of  securing 
maximum  efficiency  from  the  best  minds,  yet  not  subject- 
ing them  to  a  business  unit  so  great  in  its  scope  as  to 
baffle  thei-  judgment  and  thwart  their  personality,  is  one 
which  largely  determines  the  size  to  which  modem  business 
enterprises  can  successfully  grow. 

The  psychological  difficulty  extends  down  the  line  from 
the  topmost  executive  to  the  common  laborer.  Foremen 
are  men  subject  to  strong  bonds  of  habit,  and  tradition, 


Management:    Its  Technique  269 

and  all  attempts  made  by  superiors  to  better  their  toueh 
with  'laborers  come  up  against  the  recalcitrance  and  fixity 
of  the  foreman's  psychology.  In  the  mind  and  experience 
of  the  laborer,  the  foreman  represents  the  company,  and 
is  the  symbol  of  what  the  company  stands  for.  In  most 
companies,  workers  are  at  the  mercy  of  foremen,  bossed 
by  them,  paid  by  them,  chosen  by  them,  fired  by  them, 
promoted  by  them,  and  in  the  eyes  of  workers,  modern 
industrial  autocracy  very  widely  means  simply  the  petty 
tyranny  and  capricious  domination  of  foremen.^  The  per- 
sonal touch  between  the  owner  and  worker  in  the  small 
plant  is  gone,  and  the  large  corporation  is  a  great  imper- 
sonality, interpreted  to  the  workers  through  the  medium 
of  petty  bosses  and  foremen. 

The  imperfect  human  relations  of  large  corporations 
have  been  prominent  forces  in  the  disappointments  and  fail- 
ures of  large  businesses  in  the  past.  It  is  most  significant, 
however  that  in  recent  years,  and  particularly  as  an  out- 
growth of  the  World  War,  pioneer  leaders  of  great  corpora- 
tions have  demonstrated  the  practicability  of  a  new  sci- 
ence of  human  relations.  Many  leading  corporations  have 
created  Departments  of  Industrial  Relations,  the  basic  pur- 
pose of  which  is  to  organize  the  human  factor  in  industry. 
Practical  experience  has  already  worked  out  a  body  of 
scientific  principles  of  labor  relations  and  control  for  the 
effective  treatment  of  the  human  industrial  problem.  This 
body  of  principles  includes  such  matters  as  the  inaugura- 
tion of  employees'  representation  in  the  form  of  works  coun- 
cils or  shop  committees,  the  adjustment  of  questions  of 
hours  and  wages  in  frank  consultation  with  workers,  the 
systematic  stimulation  of  right  incentives  and  motives  in 
work,  the  better  care  of  employees  through  improved  light, 
heat,  ventilation,  and  safety  facilities,  the  development  of 
a  spontaneous  confidence  in  company  policy  by  suggestion 
systems,  collective  bargaining,  medical  care,  vacations,  and 
insurance  aid.  This  new  science  of  human  administration 
goes  far  toward  overcoming  the  original  handicaps  of  large 

1  S.  Webb,  "The  Works  Manager  Today,"  p.  27.  vSee,  also,  Whiting 
Williams,  "What's  On  the  Worker's  Mind?"  Chapters  11-14. 


270  Management:    Its  Technique 

business  organizations  in  dealing  with  the  labor  factor. 
Once  the  psychology  of  labor  has  been  brought  under  ade- 
quate control,  the  economies  of  large  scale  production  need 
not  be  confined  primarily  to  industries  operating  under 
mechanical  and  standardized  processes,  but  "will  be  possible 
in  an  enlarging  degree  for  industries  in  which  human  skill 
and  personal  interest  are  major  factors.  The  very  recent 
developments  in  the  science  of  industrial  relations  have  a 
direct  bearing,  therefore,  upon  the  most  efficient  size  of 
business  units,  and  upon  the  possible  economies  of  large 
consolidations. 

The  trials  and  difficulties  of  large  business  lead,  more- 
over, to  an  analysis  of  some  of  their  fundamental  relations 
to  bankers  and  financial  interests.  The  intimate  relations 
established  between  new  corporation  promotions  and  the 
investment  bankers  and  syndicate  of  underwriters  which 
float  the  corporation  securities;  the  banking  connections  of 
boards  of  directors  which  are  of  aid  in  the  maintenance  of 
adequate  credit  for  working  capital  purposes;  the  ties 
formed  between  railroads  and  other  corporations  and  their 
bankers  during  periods  of  receivership  and  reorganization; 
and  the  confinement  of  the  attention  of  boards  of  directors 
very  largely  to  questions  of  finance,  all  serve  to  subordinate 
nearly  all  other  corporation  problems  to  the  uppermost 
problem  of  corporation  finance.  The  history  of  the  finan- 
cial relations  of  the  great  American  trusts  certainly  bears 
out  the  broad  conclusion  made  by  a  careful  English  econo- 
mist, Alfred  Marshall,  that  "a  great  part  of  the  railways 
and  the  chief  manufacturing  and  mining  businesses  of 
America  are  largely  under  the  control,  for  good  and 
evil,  of  a  comparatively  small  number  of  powerful  finan- 
ciers."^ 

A  widely  adopted  form  of  this  financial  influence  is  found 
in  interlocking  directorates.  Each  one  of  the  members  of 
a  bank 's  board  of  directors,  and  its  major  executive  officials 
may  be  members  of  the  boards  of  anywhere  from  half  a 
dozen  to  half  a  hundred  corporations.  The  Clayton  Act 
of  1914  prohibits  interlocking  directors  between  corpora- 

1  "Tndiistry  nnrl  Trade,"  p.  540. 


Management:    Its  Technique  271 

tions  which,  by  the  nature  of  their  business,  are  actual 
or  potential  competitors,  where  interlocking  directorates 
might  tend  to  restrain  competition  unduly.  The  act  is  not 
a  sweeping  prohibition  of  all  interlocking  directorates, 
but  rather  a  prohibition  aimed  to  thwiart  interlocking 
which  would  have  as  its  effect  the  building  of  monopoly 
advantages  or  the  unreasonable  restraint  of  competition. 
Interlocking  directorates  are  still  permissible  where  they 
do  not  encroach  upon  this  prohibition,  and  hence  they 
exist  at  present  on  a  broad  scale,  and  are  important  fi- 
nancial connecting  links  between  corporations  and  financial 
houses.  There  is  nothing  in  this  relationship  which  in- 
dicates a  "money  trust,"  or  a  conspiracy  of  bankers  to 
dominate  the  business  of  the  country,  a  charge  which  is 
often  loosely  made.  The  true  significance  of  the  relation- 
ship is  simply  that  "the  structure  of  modern  capitalism 
tends  to  throw  an  ever-increasing  power  into  tlie  hands 
of  the  men  who  operate  the  monetary  machinery  of  in- 
dustrial communities,  the  financial  class.  "^ 

The  financial  needs  of  the  large  consolidation  for  work- 
ing capital,  raw  materials  in  process  of  manufacture,  pay 
envelope  funds,  etc.,  are  largely  accommodated  by  com- 
mercial borrowing  from  banks;  and  the  greatest  vigilance 
is  necessary  on  the  part  of  the  corporation's  overseers  to 
have  ample  funds  available  to  pay  off  such  loans  at  the 
proper  periods,  or  to  have  the  state  of  the  business  strong 
enough  to  make  bankers  feel  safe  in  extending  loans  in- 
stead of  exacting  prompt  payment.  In  times  of  business 
depression  or  crisis,  with  the  assets  of  a  corporation  de- 
preciating in  value,  and  a  general  psychological  anxiety 
throughout  the  banking  community,  the  corporation  must 
be  able  to  meet  promptly  its  commercial  credit  obligations 
in  ease  the  banks  feel  it  necessary  to  liquidate  the  obliga- 
tions. Failure  to  meet  the  obligations  when  demanded 
means  a  state  of  insolvency.  The  constructive  aid  of  affil- 
iated financiers  is  of  life-saving  value  at  such  critical 
periods,  and  in  numberless  instances,  a  lenient  and  co-opera- 
tive attitude  on  the  part  of  the  financial  institutions  is  the 

1  J.  A.  Ilobson,  "The  Evolution  of  Modern  Capitalism,"  pp.  235-257. 


272  Management:    Its  Technique 

only  factor  which  makes  it  possible  for  the  large  corpora- 
tion to  "round  the  corner"  of  the  critical  period.  More- 
over, the  borrowings  of  the  corporation  for  purposes  of 
fixed  capital,  such  as  buildings,  or  machinery,  entail  cer- 
tain interest  charges  which  have  to  be  met  regularly.  Fail- 
ure to  meet  the  interest  charges  means  a  state  of  insolvency. 
The  ultimate  source  of  payments  of  all  credit  obligations 
is  the  earnings  of  the  corporation.  If  these  earnings 
are  not  large  enough  to  meet  the  payments  when  due,  no 
matter  whose  the  fault,  the  corporation  is  ready  for  bank- 
ruptcy. But  it  happens  with  any  number  of  corporations 
and  their  financial  backers  that  during  a  period  of  pros- 
perity, with  profits  running  high  and  business  booming, 
the  optimism  of  the  times  grips  the  imagination  of  the 
corporate  overseers,  and  impels  them  to  over-expansion, 
over  -  capitalization,  over  -  borrowing.  Time  and  again, 
bankers  and  corporation  directors  prove  victims  of  their 
own  psychology,  and  in  the  great  tide  of  money  making 
and  expanding  and  building  of  a  period  of  prosperity,  they 
forget  the  law  of  business  cycles,  forget  that  a  little  later 
on  will  come  the  return  swing  of  the  pendulum,  with  de- 
pression, low  earnings  or  actual  losses,  hard  times,  tight 
money,  and  general  liquidation.  When  the  turn  does  come, 
the  financial  overseers  of  the  corporation  try  often  to  keep 
up  appearances  by  paying  dividends  whether  they  have 
been  earned  or  not,  and  this  effort  is  the  paramount  im- 
mediate cause  of  the  bulk  of  industrial  bankruptcies.^ 
The  financial  interests  unfailingly  endeavor  to  keep  the 
price  of  securities  on  the  investment  market  at  desired 
levels,  and  of  course  face  the  problem  of  maintaining  am- 
ple value  in  the  stocks  and  bonds  serving  as  collateral  se- 
curity for  much  of  the  corporation's  commercial  credit. 
Even  at  best,  with  all  financial  interests  unselfish,  and  de- 
voting intelligent  attention  to  the  welfare  of  the  consoli- 
dation, the  financial  status  of  the  corporation  requires  the 
most  painstaking  vigilance.  Under  less  favorable  mo- 
tives, with  occasional  recklessness  or  selfishness  on  the  part 

1  A.    Dewing,   "Corporate   Promotiona    and    Reorganizations,"   pp. 
546-557. 


Management:    Its  Technique  273 

of  dominant  financial  interests,  or  with  excessive  greed  for 
immediate  power  or  profit,  the  financial  status  of  the  busi- 
ness combination  has  in  numerous  instances  been  deplor- 
able. In  certain  cases,  large  scale  fraud  in  the  manipula- 
tion of  securities  and  speculation  where  conservatism  was 
sorely  needed  have  ruined  corporations,  and  brought  un- 
told loss  to  innocent  and  helpless  investors.  New  England 
people  will  not  soon  forget  the  manipulations,  which  the 
Interstate  Commerce  Commission  so  vigorously  con- 
demned, in  the  affairs  of  the  New  York,  New  Haven  and 
Hartford  Railroad.^ 

AU  of  these  financial  complications  continually  present 
grave  problems  for  the  large  combinations  to  solve.  Their 
relations  with  the  financial  institutions  must  in  the  very 
nature  of  the  case  be  fairly  intimate.  The  large  consoli- 
dations in  almost  every  line  of  industry  are  constantly 
drawn  into  close  contact  with  the  investment  and  com- 
mercial bankers.  The  influence  of  the  financiers  upon  the 
directorates  of  modern  large  corporations  is  a  natural  out- 
come of  the  structure  of  corporate  institutions.^ 

From  all  the  foregoing  facts  and  considerations,  it  is 
obvious  that  many  of  the  large  consolidations  have  by  no 
means  had  easy  sledding.  Disappointments  from  unreal- 
ized efficiencies  and  economies  have  been  frequent,  and 
illusions  about  rich  earnings  have  been  repeatedly  ex- 
ploded. The  consolidation  movement  had  its  greatest  in- 
nings at  a  period  when  the  American  people  were  whisked 
off  their  feet  by  a  temporary  awe  of  and  credulous  trust 
in  bigness.  The  grandeur  of  size  caught  the  imagination 
of  bankers,  of  business  men,  and  of  the  people.  It 
was  accepted  without  proof  that  if  a  business  could  but 
become  big  enough,  its  economies  would  be  almost  unlim- 
ited and  its  earnings  would  be  wellnigh  fabulous.  The 
psychological  bubble  was  pricked  by  the  hardships  of 
costly  experience  and  the  disappointments  of  corporation 
history.    Through  all  the  period  of  consolidation  and  con- 

1  See,  also,  W.  Z.  Ripley's  "Trust  Pools  and  Corporations,"  pp. 
23-30. 

2  H.  G.  Moulton,  "Money  and  Banking,"  Cliapter  XI. 


274  Management:    Its  Technique 

centration,  those  trusts  which  had  to  rely  for  their  suc- 
cess mainly  upon  the  economies  and  efficiencies  of  large 
scale  operation  have  either  met  with  indifferent  success  or 
have  failed  outright.  The  trusts  with  glowing  records  of 
high  dividends  and  huge  profits  are  usually  those  which 
attained  a  substantial  power  of  monopoly  over  prices,  and 
which  held  a  position  from  which  they  could  take  unfair 
advantage  of  the  surviving  small  competitors.  Either  this, 
or  they  had  for  a  time  the  leadership  of  an  executive  of 
the  rarest  ability,  one  of  the  towering  captains  of  industry 
of  the  last  generation  in  America  who  had  the  genius  to 
make  a  go  during  their  lifetimes  of  an  otherwise  scarcely 
profitable  consolidation.^ 

The  part  which  management  plays  in  the  whole  eco- 
nomic organization  is  obviously  a  leading  one.  Manage- 
ment is  to-day  divorced  from  ownership.  Owners  are 
holders  of  corporate  securities,  and  need  have  no  direct 
interest  in  the  properties  nor  give  any  personal  attention 
to  their  care  and  government.  Managers  work  for  a  salary 
primarily,  although  in  places  they  also  are  interested  as 
part  owners  in  the  business.  Directors  of  banks  and  cor- 
porations concern  themselves  mainly  with  financial  matters, 
leaving  questions  of  labor,  production  and  technique  to 
the  presidents,  vice-presidents  and  engineers  of  the  plants. 
Profits  go,  not  to  the  men  who  manage  the  business,  but 
mainly  to  those  who  own  the  business.  The  psychology  of 
management  shows  that  bankers  and  corporation  execu- 
tives are  men  usually  of  rare  and  great  mental  and  instinc- 
tive equipment,  but  that  a  large  proportion  of  them,  or  all 
of  them,  will  be  found  subject  to  the  sway  of  customs,  tra- 
ditions, and  habits.  Optimism  gets  the  better  of  them 
during  periods  of  prosperity,  and  miscalculation  leads 
their  businesses  into  precarious  positions  repeatedly.  Iner- 
tia and  prejudice  keep  thousands  of  them  from  taking  up 
with  the  latest  improvements  in  machinery  and  technology 
of  production,  and  inability  or  unwillingness  to  handle  the 

1  See  A.  Dewing's  "Corporate  Promotions  and  Reorganizations," 
pp.  563-568.  Also  W.  S.  Stevens's  "Industrial  Combinations  and 
Trusts,"  pp.  574-580. 


Management:     Its  Technique  275 

technique  of  the  modern  science  of  management  causes  ap- 
palling wastes  throughout  the  economic  system.  On  the 
other  hand,  modern  corporate  management  has  increased 
the  productivity  of  the  individual  worker  by  making  possi- 
ble the  large  scale  use  of  machinery.  Modern  management 
directs  the  economic  energies  of  society  with  a  degree  of 
efficiency  which  surpasses  any  other  form  of  economic 
government  that  men  have  yet  contrived. 

The  shortcomings  of  management  indicate  primarily  the 
lines  of  evolution  for  the  future.  The  recent  determination 
of  management  to  organize  human  relations  in  industry 
is  an  admirable  example  of  the  ability  of  management  to 
adapt  itself  to  the  challenging  difficulties  of  a  particular 
period.  The  extremes  and  excesses  of  managerial  policy 
appear  to  be  coming  under  control.  The  tests  of  business 
success  are  now  more  than  ever  before  seen  in  the  increas- 
ing attitude  that  exploitation  of  labor  as  a  means  of  reap- 
ing profits  must  be  a  thing  of  the  past;  that  abuse  of  in- 
vestors' money  deserves  criminal  prosecution;  and  that 
moderation  in  the  use  of  monopoly  advantages  and  stability 
rather  than  exorbitance  of  prices  is  desirable. 

In  days  gone  by,  capital  was  a  term  which  covered  both 
management  and  ownership.  Recent  economic  evolution 
has  brought  out  the  manager  as  a  distinct  and  separate 
factor.  The  overmastering  characteristic  of  successful 
management  is  a  threefold  responsibility:  to  the  public, 
courteous  service,  standard  quality  of  goods,  reasonable 
prices;  to  the  owners,  safe-keeping  of  investments,  and 
moderate  profits;  to  the  laborers,  living  wages,  democratic 
treatment,  healthful  working  conditions,  a  creative  inter- 
est in  work.  The  day  when  the  responsibility  of  business 
was  selfishly  looked  upon  as  almost  an  exclusive  responsi- 
bility to  owners, — a  responsibility  to  harvest  the  maxi- 
mum profits,  without  fear  or  favor, — is  beginning  to  pass. 
The  modern  manager  of  the  best  type  recognizes  a  three- 
fold responsibility  for  the  positive  benefit  of  laborers,  own- 
ers, and  consumers.  The  test  of  successful  management 
is  the  performance  of  this  balanced  threefold  responsibility. 

The  characteristics  of  the  present  economic  period  re- 


276  Maiiagement:    Its  Technique 

fleet  again  and  again  the  problem  of  the  size  of  the  busi- 
ness organization.  The  question  of  big  business  or  little 
business  is  one  calling  for  incessant  attention.  It  may 
safely  be  declared  that  the  question  has  not  yet  been  fully 
decided.  And  yet,  out  of  the  tendencies  and  developments 
of  the  last  decade,  certain  fundamental  lessons  can  clearly 
be  read.  .The  large  business  unit  has  come  to  stay.  A  re- 
turn to  the  old  days  of  laissez-faire  competition  between 
little  business  establishments  is  unthinkable.  A  new  com- 
petition has  come  into  activity, — a  competition  between 
bigger  parties.  In  the  branches  of  industry  where  con- 
solidation has  gone  far,  the  biggest  combinations  operate 
in  the  same  field  with  a  dozen,  or  a  score,  or  a  hundred  in- 
dependents. But  the  independents  themselves  are  larger, 
and  the  competition  which  now  exists  is  none  the  less  com- 
petition because  it  prevails  between  larger  business  units. 
For  a  time,  the  public  and  the  courts  seemed  inclined 
to  destroy  big  business  merely  because  of  its  size.  That 
inclination  is  on  the  wane,  and  in  its  place  has  come  the 
more  matured  inclination  to  outline  the  new  rules  of  the 
game  in  such  a  fashion  as  to  give  businesses  both  large  and 
small  a  chance  for  a  trial  of  strength  on  issues  of  efficiency 
and  economy.  The  Supreme  Court  has  declared  emphati- 
cally that  under  the  Sherman  Anti-Trust  Law  of  1890,  it 
will  not  condemn  business  merely  because  it  has  grown 
large.  If  it  is  not  guilty  of  unfair  and  destructive  competi- 
tion, if  it  is  not  holding  its  position  because  of  unreasonable 
restraint  of  trade  or  undue  monopoly  power,  if  it  can 
remain  large  or  grow  larger  while  still  playing  the  game 
under  the  new  rules;  if  it  can  carry  on  its  large  scale 
enterprise  with  efficiency  under  those  rules,  it  may  con- 
tinue in  existence,  no  matter  what  its  size.  The  size  of 
maximum  efficiency  will  vary  with  each  branch  of  economic 
activity,  and  trial  and  experiment  alone  will  decide  in 
each  case  where  the  point  will  lie.  Where  modern  business 
management  is  recalcitrant,  and  dodges  persistently  the 
rules  of  fair  dealing  with  competitors,  with  labor,  with 
owners,  with  the  public,  the  instruments  of  public  control 
are  not  wanting.    Regulating  commissions,  price  fixing  cam- 


Management:    Its  Technique  277 

missions,  public  service  commissions,  publicity  and  investi- 
gating commissions,  are  available  already,  and  others  can 
be  easily  created  by  a  public  acquainted  with  the  means  of 
control  set  up  to  meet  the  needs  of  the  country  during  the 
period  of  the  World  War.  The  blind  fear  of  monopoly  and 
the  blind  trust  in  competition  are  both  giving  way  to  a 
discovery  that  there  is  something  useful  to  the  economic 
community  in  that  degree  of  monopoly  which  accompanies 
large  scale  business  or  which  takes  the  form  of  open  co- 
operation between  concerns  in  a  given  line  of  trade;  and 
that  there  is  something  dangerous  in  the  form  of  unbridled 
competition  which  is  ruinous  and  deadly  for  the  competi- 
tors. 

More  and  more,  the  modern  type  of  business  govern- 
ment makes  room  for  co-operation  in  economic  activity. 
Business  can  still  compete,  yet  in  many  policies  serve  the 
community  and  itself  better  by  taking  counsel  and  by  co- 
operation which  will  bear  the  light  of  publicity.  Destruc- 
tive competition  gives  way  to  constructive  competition ;  and 
monopoly  in  restraint  of  trade  gives  way  to  co-operation 
in  the  aid  of  trade.  The  new  standards  of  competition  and 
the  new  standards  of  co-operation  are  still  in  the  process 
of  development  and  evolution,  but  their  features  are  now 
distinct  enough  to  make  clear  that  a  reconstruction  of  the 
size  and  character  of  business  management  has  been  taking 
place  in  recent  years.  The  reconstruction  of  business  man- 
agement along  the  lines  of  responsibility  to  consumers, 
owners  and  workers  is  a  cardinal  feature  of  the  economic 
developments  of  the  last  generation. 

REFERENCES 

Marshall:  Industry  and   Trade,  pp.  140-177,  197-249,  308-394 

Commons,  J.  R.:  Industrial  Government 

Brandeis,  L.  :  Business — a  Profession 

Jones,  E.:  The  Trust  Problem  of  the  United  States 

Adams,  H.  C:  Description  of  Industry,  Chapters  VII,  XIII,  XIV 

Clay,  H.:  Economics  for  the  General  Reader,  Chapters  III,  V- 

VIII,  XXIII-XXIV 
Marshall  and  Lyon:    Our   Economic  Organization,   Chapters 

XV-XVIII,  XXI-XXV 


278  Management:     Its  Technique 

Marshall,  L.  C.  :  Readings  in  Industrial  Society,  Chapters 
X-XV 

Bloomfield,  M.:  Management  and  Men 

Bloomfield,  D.:  Employment  Management 

Federal  Commission  on  Industrial  Relations,  1915,  Final  Report 

Bassett,  W.  R.:  When  the  Workmen  Help  You  Manage;  The 
Organization  of  Modern  Business 

Veblen,  T.:  The  Vested  Interests  and  the  State  of  the  Indus- 
trial Arts;  The  Engineers  and  the  Price  System 

Wood,  C.  W.  :  The  Great  Change 

LiPPlNCOTT,  I.:  Economic  Development  of  the  United  States, 
Chapters  XXI-XXVII 

Baker,  R.  S.  :  The  New  Industrial  Unrest 

Gantt,  H.  L.  :  Industrial  Leadership ;  Organizing  for  Work 

HoxiE,  R.  F. :  Scientific  Management  and  Labor 

Kester,  R.  B.:  Accounting 

Paton  and  Stevenson:  Principles  of  Accounting 

Brisco,  N.  a.:  Economics  of  Business 

Copeland,  M.  T.  :  Business  Statistics 

Duncan,  J.  C. :  Principles  of  Industrial  Management 

Duncan,  C.  S.:  Commercial  Research 

Frederick,  J.  G. :   Business  Research  and  Statistics 

Gowin,  E.  B.:  The  Executive  and  His  Control  of  Men 

Jones,  E.  D.:  Administration  of  Industrial  Enterprises;  The 
Business  Administrator 

Taylor,  F.  W.:  Scientific  Management 

Shaw,  A.  W. :  An  Approach  to  Business  Problems 

Thompson,  C.  B.:  Scientific  Management 

Veblen,  T.  :  Theory  of  Business  Enterprise,  Chapters  I-IV,  X 

Tipper,  H.:  The  New  Business 

Wilson,  W.  :  The  New  Freedom 

Stevens,  W.  S.:  Industrial  Combinations  and  Trusts 

Haney,  L.  H.  :  Business  Organization  and  Combination 

Kimball,  D.  S.:  Principles  of  Industrial  Organization 

Redfield,  W.  C.  :  The  New  Industrial  Day 

Scott,  W.  D.:  Increasing  Human  Efficiency  in  Business 

Rowntree,  B.  S.:  The  Human  Factor  in  Business 

Committee  of  Federated  American  Engineering  Societies,  Waste 
in  Industry 

Lewisohn,  S.  A.:  Atlantic  Monthly,  Vol.  126,  pp.  414-418 


CHAPTER  IX 

MARKETS— THEIR    PRINCIPLES    AND    STRATEGY 

The  market  is  the  buying  and  selling  institution  of  the 
economic  system.  Goods  and  services  are  not  exchanged 
directly,  as  a  rule,  but  indirectly  by  the  use  of  a  medium 
of  exchange,  i.e.,  money.  In  eveiyday  life,  the  value  of 
goods  and  services  is  thought  of  in  terms  of  money  and 
of  price.  The  amount  of  money  which  we  exact  before  part- 
ing with  goods  or  services,  or  the  amount  of  money  with 
which  we  are  willing  to  part  in  order  to  obtain  the  goods  or 
services  of  some  one  else  is  a  pecuniary  measure  of  value. 
In  the  market,  goods  or  services  are  worth  to  us  individual- 
ly the  amount  of  money  which  we  are  willing  to  surrender 
in  order  to  secure  them.  Most  of  the  feeling  and  thinking 
which  goes  on  in  the  markets  of  modern  society  clusters 
about  prices.  Instead  of  stating  that  a  suit  of  clothes  is 
w'orth  twenty  bushels  of  wheat,  we  state  that  a  suit  of 
clothes  is  worth  forty  dollars,  and  that  with  w^heat  at  two 
dollars  a  bushel,  twenty  bushels  of  wheat  are  worth  as  much 
as  a  suit  of  clothes.  All  commodities  that  are  bought  and 
sold, — pig  iron,  bread,  diamonds,  coal, — pass  through  the 
market  at  a  money  price.  By  putting  prices  on  different 
grades  and  types  of  labor,  on  books,  poetry,  music  or  pic- 
tures, on  educational  services,  on  executive  ability,  or  on 
shoes,  corn,  furniture  and  an  innumerable  mass  of  things, 
it  is  possible  to  arrive  at  value  comparisons. 

There  are  two  important  aspects  of  the  concept  of  value. 
On  the  one  hand  there  is  a  positive  quantity  of  desirability 
or  appeal  in  any  specific  commodity  or  service  taken  by 
itself;  on  the  other  hand,  there  is  a  comparative  element 
in  the  degree  of  desirability  found  in  various  commodities 
or  services.  The  former  aspect  has  often  been  termed 
'  *  value  in  use, ' '  and  the  latter  aspect,  * '  value  in  exchange. ' ' 

279 


280     Markets — Their  Priiiciples  and  Strategy 

Economic  terminology,  in  describing  the  former  aspect 
of  value,  has  employed  a  wide  variety  of  words.  Goods 
have  "utility,"  which  is  the  "power  to  satisfy  human 
wants."  Each  good  or  service  arouses  a  certain  "quantity 
of  desire,"  an  "intensity  of  desire."  Each  offers  a  certain 
amount  of  "gratification,"  or  of  "satisfaction."  In  ex- 
plaining the  comparative  aspect  of  value,  economic  termi- 
nology has  included  such  statements  as  that  "value  is  the 
power  of  a  good  to  command  other  goods  in  exchange,"  or 
that  "value  is  the  rate  at  which  a  commodity  exchanges 
for  others." 

The  positive  and  the  relative  aspects  of  value  are  two 
different  phases  of  the  same  thing.  Value  is  not  exclusively 
a  relative  nor  exclusively  an  absolute  concept, — it  is  both. 
Marketing  institutions  are  organized  around  the  values  of 
commodities.  The  market  provides  a  structure  of  buying 
and  selling,  through  which  values  are  compared,  estimated, 
created,  diminished.  The  money  unit  of  measurement 
translates  values  into  a  common  language  of  prices,  and 
thereby  makes  possible  on  a  gigantic  scale  the  trading  be- 
tween buyers  and  sellers  for  the  satisfaction  of  human 
wants  and  desires. 

The  marketing  branch  of  economic  activity  has  expanded 
immensely  in  modern  times.  The  income  of  the  laborer, 
the  business  manager,  the  investor  or  the  professional  man 
is  a  money  income.  These  people  receive  payment  for 
their  efforts,  not  in  tangible  commodities,  but  in  a  sum  of 
money  Avith  which  commodities  can  be  purchased.  Even  in 
the  agricultural  industries,  a  major  part  of  productive 
effort  is  devoted  to  preparing  commodities  for  sale  in  the 
market,  and  only  a  small  fraction  of  the  farmer's  crop  is 
devoted  to  his  personal  consumption.  He  sells  it  for  a 
sum  of  money,  and,  with  the  money  purchases  other  com- 
modities to  satisfy  his  wants  as  a  consumer. 

The  business  of  buying  and  selling  has  come  to  occupy 
more  and  more  of  the  time  and  energy  of  employers  and 
employees;  and  distribution  has  come  to  be  a  most  im- 
portant factor  in  the  economic  system.  The  impressive 
fact  of  the  case  to-day  is  that  it  costs  more  to  market  the 


Markets — Their  Principles  and  Strategy     281 

average  article  than  to  produce  it.  "It  costs  more  to  sell  the 
world's  goods  than  to  make  them."^  This  increasing  im- 
portance of  marketing  has  been  strongly  noticeable  during 
recent  years.  One  authority  estimates  that  the  number  of 
people  required  to  distribute  one  thousand  dollars'  worth 
of  goods,  has  increased  over  50  per  cent,  in  the  last  twenty 
years.-  Buying  and  selling  are,  therefore,  of  basic  im- 
portance in  the  range  of  economic  activities,  and  the  laws 
determining  values  and  prices  in  the  course  of  the  market- 
ing process  deserve  careful  study. 

Values  and  prices  are  not  set  in  a  purely  arbitrary  way 
by  inexorable,  fixed  economic  laws.  There  is  a  surprising 
amount  of  flexibility,  and  elasticity  in  the  influences  bear- 
ing upon  prices.  There  is  room  for  an  immense  amount 
of  human  strategy  in  manipulating  the  factors  which  in- 
fluence prices.  But  there  are  certain  broad  and  funda- 
mental principles  which  underlie  prices  and  values.  These 
are  often  termed  laws  of  economics,  and  the  term  is  cor- 
rect if  it  does  not  mislead  one  into  supposing  that  the  so- 
called  laws  are  absolute,  unwavering,  unswerving,  leaving 
little  or  no  room  for  human  cunning,  manipulation,  and 
strategy. 

The  Cost  of  Production  Theory  of  Prices 

One  economic  theory  is  that  prices  tend  to  approximate 
the  cost  of  production  of  goods.  If  prices  soar  far  above 
the  cost  of  production  the  profits  will  be  so  high  that  busi- 
ness men  will  flock  to  that  branch  of  activity  and  by  their 
increased  production  and  increased  competition  will  tend 
to  force  prices  down  to  normal  levels,  i.e.,  levels  approxi- 
mating the  cost  of  production.  If  prices  fall  below  the  cost 
of  production,  men  will  be  losing  money  and  will  retire  from 
that  branch  of  business  in  such  numbers  that  the  supply 
will  fall  off  and  under  the  scarcity  of  supply,  prices  will 
rise  to  the  normal  level,  i.e.,  the  level  approximating  the 

1  C.  W.  GerstenberfT,  "Principles  of  Business,"  p.  404.  See,  also, 
G.  B.  Diblee,  "Laws  of  Supply  and  Demand,"  Chapter  VI.  Especially 
p.  62. 

2  J.  G.  Frederick,  "Business  Research  and  Statistics,"  pp.  102-105. 
See,  alsd,  Nystrom,  "Econbmicfs  df  Rfc'taiHng,"  p.  14, 


282     Markets — Their  Principles  and  Strategy 

cost  of  production.  Selling  prices  cannot  long  stay  below 
cost  of  production  "without  ruining  the  branch  of  industry 
concerned.  Selling  prices  below  the  cost  of  production 
indicate  selling  at  a  loss,  and  loss,  unless  checked,  leads 
rapidly  to  bankruptcy.  Hence  the  cost  of  production  sets 
a  minimum  level  below  which  prices  must  not  fall  for  any 
considerable  length  of  time. 

Above  this  base  line  there  is  room  for  the  play  of  com- 
petition among  dealers,  for  monopoly  price  maintenance, 
for  varied  strategy  and  ingenuity.  Profiteers  may  reap 
rich  harvests  from  forcing  prices  for  a  time  well  above 
the  base  line  of  cost  of  production  and  speculators  may 
take  advantage  of  the  play  of  price  movements  to  effect 
their  speculative  gains. 

The  cost  of  production  which  sets  the  base  line  of  prices 
varies  greatly  between  producers.  Some  producers  put 
their  goods  out  with  a  low  cost,  others  with  a  high  cost. 
The  difference  between  the  most  costly  production  and 
the  least,  is  often  very  marked.  A  concern  which  is  unfa- 
vorably located,  which  has  to  buy  raw  materials  in  small 
quantities,  which  has  inefficient  management,  which  has 
constant  labor  troubles  and  a  wide  variety  of  other  diffi- 
culties, suffers  from  a  high  cost  of  production.  Another 
concern  in  the  same  branch  of  production  which  is  free 
from  such  difficulties  enjoys  low  cost  of  production.  This 
gives  rise  to  an  important  economic  question :  which  cost 
of  production,  the  high  or  the  low,  establishes  the  standard 
for  prices?  Do  the  expensive  plants,  the  poorly  located 
and  poorly  managed  plants,  set  the  price  standards?  Or 
are  the  standards  set  by  the  eiffcient,  booming,  brilliantly 
handled  and  fortunately  located  plants?  For  certain  rea- 
sons which  can  be  very  briefly  explained,  it  is  the  high 
cost  plants  which  tend  to  set  the  level  below  which  prices 
must  not  fall.  The  plants  with  highest  cost  would  have 
to  go  out  of  business  if  prices  fell  below  their  cost  of  pro- 
duction. They  would  lose  money  from  prices  inadequate 
to  cover  their  costs  and  would  of  necessity  close  down. 
But  society  would  then  find  its  supply  of  goods  in  that 
branch  of  production  insufficient.     The  plants  of  low  pro- 


Markets — Their  Princii)les  and  Strategy     283 

duction  cost  cannot  supply  the  entire  need  and  demand 
of  society.  The  plants  of  high  production  cost  must  be 
continued  in  operation  if  the  total  supply  is  to  be  adequate. 
The  high  costs  of  the  latter  group  of  concerns  are  known 
as  marginal  costs.  Marginal  costs  are  the  costs  of  those 
concerns  which  are  just  on  the  margin  between  life  and 
death.  Their  costs  are  so  high  that  they  can  barely  keep  go- 
ing at  the  prices  prevailing.  They  are  the  producers  who 
are  just  able  to  make  both  ends  meet  and  no  more.  They  are 
the  ones  who  can  scarcely  keep  their  heads  above  water.  But 
because  what  they  do  produce  is  indispensable,  because  so- 
ciety cannot  do  without  it,  these  marginal  producers  have 
to  be  paid  prices  high  enough  to  meet  their  high  costs. 
Hence  it  comes  about  that  this  high  level  becomes  the  gen- 
eral level  for  the  market.  Marginal  cost,  i.e.,  the  cost  for 
the  man  who  can  barely  make  prices  cover  his  expenses, 
sets  the  minimum  below  which  prices  must  not  fall  for 
everybody.  Meantime  the  other  producers,  with  lower 
costs,  find  themselves  making  royal  profits,  through  no 
fault  of  their  own,  but  through  the  necessity  on  the  part 
of  society  of  keeping  the  costly  producers  alive  in  order 
to  make  production  adequate  to  meet  society's  needs. 

The  operation  of  this  principle  is  well  illustrated  in  the 
production  of  coal.  Some  mines  are  able  to  produce  coal 
very  cheaply.  By  virtue  of  the  use  of  modern  mining  ma- 
chinery, of  efficient  administration  of  labor,  of  the  nearness 
of  the  coal  bed  to  the  surface  of  the  ground,  of  easy  trans- 
portation, and  of  many  other  favorable  factors,  these 
mines  enjoy  a  very  low  cost  of  production.  At  the  other 
extreme  is  a  group  of  coal  mines  whose  cost  of  production 
is  excessively  high.  They  are  too  small  to  employ  the  best 
machinery,  they  are  bothered  with  flooding  by  water,  they 
suffer  from  restriction  of  production  by  labor,  their  man- 
agement is  inefficient,  their  transportation  facilities  are 
poor, — for  a  wide  variety  of  reasons  it  costs  this  group  of 
mines  much  more  to  produce  a  ton  of  coal  than  it  costs  the 
highly  favored  mines.  But  the  coal  supply  of  the  coun- 
try will  be  inadequate  unless  these  low  grade  mines  are 
continued  in  operation.     The  price  of  coal  muvst  be  high 


284     Markets — Their  Principles  and  Strategy 

enough  to  cover  their  abnormally  great  cost  of  production. 
A  price  at  such  a  height,  however,  is  much  above  the  costs 
of  the  high  grade  mines.  This  excess  represents  for  the 
high  grade  mines  so  much  profit.  The  country  has  to  pay 
a  price  for  coal  which  will  keep  the  low  grade  mines  run- 
ning, or  suffer  a  coal  famine.  On  such  a  price  the  high 
grade  mines  reap  a  rich  margin  of  profit.  In  between  these 
extremes  of  high  grade  mines  and  low  grades  are  numer- 
ous intermediary  grades,  all  of  which  secure  the  price  set 
by  the  cost  of  production  of  the  low  grade  mines.  The  cost 
of  production  in  the  low  grade  mines  is  the  marginal  cost 
for  the  coal  industry  and  sets  the  price  of  coal  for  all. 

Price  fixing  during  the  war  was  generally  based  upon 
this  principle  of  marginal  cost  of  production.  The  cost  of 
production  of  the  various  grades  of  producers  was  arrived 
at  from  figures  supplied  by  the  Federal  Trade  Commission. 
F.  "W.  Taussig,  from  experience  as  Chairman  of  the  Price 
Fixing  Commission  of  the  War  Industries  Board,  directing 
price  fixing  in  such  commodities  as  iron,  steel,  copper,  lum- 
ber, wool,  hides,  cotton  fabrics,  sulphuric  acid,  nickel  alu- 
minum, brick,  cement,  etc.,  stated  the  principle  of  price  fix- 
ing as  follows:  ''It  was  cost  of  production  at  the  hands 
of  the  marginal  or  bulkline  person  that  usually  formed  the 
basis  of  the  prices  fixed. '  '^  Producers  with  low  costs  would 
reap  large  harvests,  but  they  were  caught  by  the  excess 
profits  tax. 

Statistical  studies  of  costs  and  prices  indicate  that  the 
principle  applies  about  the  same  in  normal  times  as  in 
war  times  under  price  fixing.  In  fact,  the  methods  used 
in  price  fixing  were  simply  the  carrying  over  of  normal 
price  principles  into  the  war  conditions.  A  careful  study 
of  Federal  Trade  Commission  statistics,  made  by  Kemper 
Simpson  covering  book-paper,  newsprint,  salmon,  sugar 
beets,  and  coffee,  led  to  the  finding  that  "price  approxi- 
mates bulkline  or  marginal  cost  under  normal  conditions 
of  competition."^  Statistical  studies,  therefore,  from  the 
facts  available,  tend  to  bear  out  the  general  theory  of 

1  Quarterly  Jmirnnl  of  Economics,  Feb.,  1918,  p.  240. 

2  Ibid.,  Vol.  XXXV,  p.  287. 


Markets — Their  Principles  and  Strategy    285 

marginal  cost  as  the  standard  which  establishes  price 
levels  where  a  fair  degree  of  competition  prevails.  But  it 
would  be  misleading  to  infer  that  marginal  costs  are  the 
only  factors  influencing  prices.  They  are  simply  one  of 
the  factors  and  their  full  bearing  can  be  understood  only 
as  they  are  compared  with  the  other  price  determining 
factors  which  are  working  simultaneously. 

Supply  and  Demand 

The  price  theory  of  supply  and  demand  is  undoubtedly 
the  explanation  which  most  widely  appeals  to  the  popular 
mind.  It  is  very  common,  indeed,  for  lawyers,  business 
men,  and  even  economists  to  attempt  an  explanation  of 
almost  every  bafSing  price  problem  by  a  vague  and  gen- 
eral reference  to  supply  and  demand.  The  phrase  serves 
as  a  kind  of  blanket  explanation  to  cover  every  confusing, 
perplexing  price  question,  whereas  in  reality  what  is  needed 
is  a  clarifying  analysis  of  the  principles  of  supply  and 
demand  to  determine  how  they  work  out,  and  to  what 
extent  they  work  out,  in  actual  practice. 

The  broad  principle  of  supply  and  demand  is  that  price 
is  determined  by  the  relative  strength  of  supply  of  and 
demand  for  any  commodity  or  service.  If  supply  increases 
in  proportion  to  demand,  price  falls;  if  supply  decreases 
in  proportion  to  demand,  price  rises.  Likewise  if  demand 
increases  or  decreases  in  proportion  to  supply,  price  reg- 
isters the  fluctuation.  It  follows,  too,  that  if  a  large  supply 
is  thrown  upon  the  market,  and  prices  fall,  more  goods  will 
be  consumed  because  more  can  be  bought  at  the  lower  price 
level.  If  sellers  have  on  hand  a  large  store  of  goods  which 
they  are  determined  to  get  rid  of,  they  may  sell  the  goods 
by  offering  them  at  a  lower  price.  If  the  OAvners  wish  to 
hold  their  goods,  they  may  offer  them  at  prices  high  enough 
to  discourage  buyers  from  taking  the  goods  in  any  consider- 
able quantities.  On  the  other  hand,  if  buyers  need  goods 
and  their  demand  is  urgent,  they  will  pay  high  prices  rather 
than  go  without  the  goods.  If  consumers  want  more  goods, 
they  must  pay  higher  prices.  The  value  of  goods  and  the 
prices  which  serve  as  an  index  of  value  fluctuate  in  pro- 


286    Markets — Their  Principles  and  Strategy 

portion  to  the  fluctuations  of  demand  and  supply.  The 
general  theory  states  that  the  more  goods  available  the  less 
you  will  pay  and  the  less  goods  available  the  more  you  will 
pay.  When  the  price  of  a  certain  commodity  rises  it  is  an 
invitation  to  new  producers  to  enter  the  field,  and  as  they 
gradually  increase  the  supply  of  the  commodity,  the  price 
is  gradually  forced  down  again.  When  prices  fall,  they 
discourage  many  producers  from  the  field,  and  as  their  re- 
tirement gradually  reduces  supply,  prices  are  driven  up 
again.  Hence  a  continuous  relationship  betAveen  prices 
and  supply  and  demand  prevails  throughout  the  process 
of  buying  and  selling.  A  change  in  any  one  of  the  factors 
affects  the  others ;  they  are  interdependent ;  they  constantly 
influence  each  other.  By  their  adjustments  and  alterations 
they  tend  to  maintain  a  proper  balance  and  equilibrium  in 
the  great  institution  of  the  modern  market. 

However,  just  as  in  the  cost  of  production  theory,  there 
were  found  to  be  wide  differences  between  the  costs  of 
various  producers  so  in  the  supply  and  demand  theory, 
there  are  wide  differences  between  the  demands  of  various 
bu3''ers.  The  demand  for  a  new  pair  of  shoes  by  a  man  who 
already  has  a  half  dozen  pairs  and  by  a  man  wlit)se  one 
and  only  pair  is  worn  out,  is  a  differing  demand.  The 
millionaire  and  the  day  laborer  have  differing  degrees 
of  demand  for  food,  clothing  and  everything  else.  There 
are  buyers  for  whom  every  purchase  means  close  pinch- 
ing, stinting,  and  painful  stretching  of  every  penny  to 
the  limit  of  purchasing  power;  and  there  are  other 
buyers  for  whom  purchases  of  the  same  goods  are  easy, 
involve  little  or  no  stinting,  and  are  simply  offhand  buyings 
with  a  real  lack  of  interest  in  the  amount  of  the  price. 
The  same  price  may  be  offered  by  two  buyers,  one  of  whom 
has  a  most  urgent  demand  for  the  goods,  the  other  of  whom 
could  get  along  without  the  goods  as  well  as  not.  The 
differing  degrees  of  demand  exist  everywhere,  in  all  lines 
of  articles  and  services  on  the  market.  Demand  is  not  a 
uniform,  unvarying  thing, — the  same  for  everybody,  every- 
where. So  the  question  arises,  which  kind  of  demand  is 
the  paramount  force  in  settling  prices?    Is  it  the  demand 


Markets — Their  Pnnciples  and  Strategy    287 

of  the  buyer  who  can  barely  afford  to  buy  the  article  or 
the  demand  of  the  buyer  who  can  buy  with  an  easy  in- 
difference to  the  price? 

Just  as  in  the  production  cost  theory  of  prices  it  was 
the  marginal  producer,  the  man  who  could  just  barely 
make  prices  cover  expenses,  who  tended  to  establish  price 
levels,  so  in  the  supply  and  demand  theory  of  prices,  it 
is  the  marginal  buyer,  the  man  who  can  just  barely  afford 
to  buy  the  article,  who  tends  to  establish  the  price  levels. 
Marginal  demand  is  the  real  demand  force  in  determining 
prices.  The  best  point  of  view  from  which  to  grasp  the 
significance  of  marginal  demand  is  that  of  the  seller  him- 
self as  he  maps  out  a  selling  plan.  His  mind  works  through 
some  such  process  as  this :  "  I  want  to  place  100,000  pieces 
of  this  commodity  on  the  market.  Suppose  I  put  the  price 
at  one  dollar  per  piece.  I  am  afraid  that  some  people  would 
find  that  price  too  high.  I  probably  wouldn't  sell  more 
than  50,000  pieces.  There  must  be  50,000  more  people  who 
would  like  to  buy  this  thing,  but  who  will  say  to  them- 
selves, "Well,  we  can't  afford  to  pay  a  dollar  for  that 
article.  We  should  like  to  buy  it  but  at  that  price  we 
can't  quite  afford  it.  Of  course  it's  all  right  for  those 
who  have  the  money  and  who  want  to  pay  the  price,  but 
not  for  us."  Then  the  seller  w^ho  is  mapping  out  his  sell- 
ing campaign  would  reflect  further:  "I  will  offer  the  arti- 
cle at  ninety  cents.  Will  that  draw  another  50,000  buyers  ? 
I  am  afraid  not.  It  will  draw  perhaps  30,000  buyers  ad- 
ditional, but  it  will  not  sell  the  full  100,000  pieces,  I  must 
catch  the  eye  of  that  lower  20,000  in  order  to  sell  all  that 
I  want  to  sell.  That  group  at  the  bottom  of  the  ladder  is 
the  hard  group  to  persuade  to  buy;  and  they  seem  still  to 
think  they  can't  afford  to  buy,  even  at  90  cents.  Suppose 
I  reduce  the  price  to  80  cents,  I  believe  that  price  will  tempt 
them  to  part  with  their  money.  I  will  offer  the  full  hun- 
dred thousand  at  80  cents  per  piece." 

From  many  standpoints  it  seems  unfair  to  the  seller  to 
force  him  to  put  his  price  down  to  the  point  where  he  can 
induce  the  most  unwilling  buyers  to  purchase  goods.  Thou- 
sands of  buyers  would  pay  more,  probably  without  com- 


288     3Iarkets — TJieir  Principles  and  Strategy 

plaint,  but  other  thousands  would  not  buy  at  all  if  the 
price  were  any  higher.  So  the  most  reluctant  buyer,  the 
most  unwilling  consumer,  the  man  of  marginal  demand, 
sets  the  price  level  for  the  goods.  He  is  the  man  at  the 
end  of  the  line,  the  man  who  can  hardly  persuade  himself 
to  buy  even  at  the  price  calculated  to  catch  him.  He  is 
the  man  for  whom  the  question — to  buy  or  not  to  buy — 
is  a  poser,  who  is  tottering  on  the  margin  of  doubt  and 
skepticism.  The  price  for  all  has  to  be  set  at  a  level  which 
will  catch  this  marginal  group.  Of  course,  if  the  imaginary 
seller  above  wanted  to  sell  150,000  pieces  of  the  commod- 
ity, he  would  fix  his  price  still  lower  to  catch  a  still  lower 
marginal  buyer 

The  marginal  buyers  as  we  have  seen  are  the  men  who 
at  the  price  prevailing,  can  just  barely  be  persuaded  to 
buy.  Each  price  level,  therefore,  has  its  own  grade  of 
marginal  buyers,  each  price  level  has  its  own  fringe  of 
buyers  whose  demand  is  a  marginal  demand.  Above  this 
marginal  fringe  of  buyers,  there  are  other  buyers  who  could 
well  afford  to  pay  more.  But  they  do  not  have  to  pay  more 
because  if  prices  were  raised  the  marginal  fringe  of  buyers 
at  the  lower  level  would  drop  out  of  the  market  entirely 
and  the  sellers  would  be  able  to  market  only  a  fraction  of 
their  goods  at  the  higher  prices.  The  marginal  fringe  of 
buyers  occupies  the  strategic  position  in  the  demand  force 
and  bends  prices  to  their  state  of  mind.  Prices  must  bow 
to  the  whims  and  wishes  of  the  most  reluctant  buyers.  It 
must  not  be  understood  that  the  marginal  fringe  of  buyers, 
or  any  of  the  buyers  above  the  margin  for  that  matter,  are 
acting  usually  from  careful  rational  analysis  of  all  factors 
in  the  case.  They  are  in  large  measure  the  victims  of 
custom,  habit,  imitation,  suggestion,  and  tradition.  Their 
minds  are  influenced  by  social  convention,  ingenious  ad- 
vertisement, clever  salesmanship ;  and  their  decisions  are 
probably  more  often  non-rational  than  rational.  But,  by 
whatever  psychological  process,  good  or  bad,  they  reach 
a  decision  to  buy  or  not  to  buy,  that  decision  is  the  deter- 
mining force  in  the  price  scale.  To  go  behind  the  mere  fact 
of  demand;  to  go  beneath  the  fact  that  the  decision  to  buy 


Markets — Their  Principles  and  Strategy     289 

has  been  made  and  to  inquire  into  the  reasons  why  demand 
is  thus  and  so;  to  examine  the  psychology  of  the  decision, 
to  buy,  leads  to  an  analysis  of  social  and  individual  psy- 
chology and  of  the  market  as  a  social  institution.  An 
analysis  of  this  phase  of  the  market  problem  will  be  made 
later  in  this  section.^ 

There  are  then  two  conceptions  of  the  origin  of  prices, — 
the  cost  of  supply  theory  and  the  marginal  demand  theory. 
The  two  theories  are  not  incompatible  or  contradictory, 
but  'are  supplementary.  The  cost  of  supply  theory  ac- 
counts mainly  for  the  minimum  below  which  prices  cannot 
for  any  length  of  time  be  allowed  to  fall ;  and  the  marginal 
demand  theory  laccounts  for  the  maximum  above  which 
prices  cannot  for  any  length  of  time  be  allowed  to  rise. 
The  two  theories  account  for  the  upper  and  lower  limits 
of  price  levels.  If  prices  fall  below  the  lower  limits  set 
by  the  marginal  costs  of  supply,  they  cause  losses  to  the 
marginal  producers  and  drive  them  out  of  business.  If 
prices  rise  above  the  upper  limits  set  by  the  marginal 
group  of  buyers,  the  marginal  buyers  cannot  afford  to 
buy  and  producers  cannot  dispose  of  their  goods.  Mar- 
ginal cost  of  supply  determines  the  rock  bottom  below 
which  prices  cannot  drop ;  marginal  demand  determines 
the  peak  above  which  prices  cannot  soar. 

But  this  relation  of  the  two  fundamental  price  theories 
should  not  induce  anyone  to  suppose  that  either  marginal 
cost  or  marginal  demand  are  absolute  and  fixed  points. 
Marginal  producers  and  marginal  buyers  are  marginal  only 
in  reference  to  a  given  price  level.  A  higher  price  level 
brings  in  a  new  group  of  marginal  producers  even  worse 
in  the  scale  of  inefficiency  and  heavy  costs.  Likewise  a 
lower  price  level  brings  in  a. group  of  marginal  buyers  yet 
worse  off  in  the  scale  of  ability  and  willingness  to  buy. 
Lower  price  levels  eliminate  the  old  marginal  producers 
and  buyers,  and  bring  in  new  ones  at  the  new  levels.  Mar- 
ginal cost  under  any  price  level  covers  the  fringe  of  mar- 
ginal producers  who  can  just  survive  under  that  level.  It 
is  their  minimum  of  subsistence  price.  And  marginal  de- 
1  See  pp.  346-364. 


290    Markets — Their  Principles  and  Strategy 

mand  under  any  price  level  covers  the  fringe  of  marginal 
buyers  who  can  just  afford  to  buy  at  that  level.  It  is  their 
"last  straw"  price,  the  utmost  they  can  afford  to  pay,— any 
more  and  they  would  be  out  of  the  market.  So  changes  in 
price  levels  bring  corresponding  changes  in  the  grades  of 
marginal  producers  and  of  marginal  buyers.  And  the 
grades  of  marginal  producers  and  marginal  buyers  at  each 
level  tend  to  keep  the  range  of  prices  of  that  level  within 
the  upper  and  lower  limits  which  enable  the  marginal 
groups  to  keep  going.  The  marginal  groups,  on  both  sides, 
tend  to  set  the  minimum  and  maximum  limits  of  prices. 
It  very  frequently  happens  that  the  cost  of  supply  rises 
to  such  a  point  that  it  threatens  to  exceed  the  upper  limit 
set  by  demand.  At  such  a  time,  producers  who  are  fa- 
miliar with  the  market  realize  that  sooner  or  later  the  ex- 
cessive costs  will  run  prices  up  so  high  that  marginal  buyers 
will  be  driven  from  the  market,  demand  will  fall  off,  and 
it  will  be  impossible  to  dispose  of  the  supply  at  a  price 
adequate  to  meet  the  cost  of  production.  In  that  event, 
the  producer  faces  the  obligation  of  cheapening  production. 
As  a  matter  of  fact,  this  necessity  of  cheapening  the  costs 
of  supply  is  what  compels  producers  and  sellers  to  exhaust 
their  ingenuity  and  inventiveness.  Costs  must  be  cut.  It 
is  an  imperative  necessity, — that  or  failure.  Goods  can- 
not be  sold  in  adequate  quantities  above  certain  prices,  and 
costs  must  be  pared  down  to  make  those  prices  possible. 
Under  this  compulsion  a  wide  range  of  economic  move- 
ments has  arisen  and  has  played  a  most  important  role 
in  economic  activity.  The  chief  reason  for  the  movement 
toward  combination  in  industry  was  the  necessity  for  elim- 
inating the  excessive  costs  of  cutthroat  competition.  For 
the  purpose  of  lowering  costs  leading  producers  maintain 
staffs  of  scientists,  inventors  and  research  experts,  whose 
time  and  effort  are  devoted  to  the  discovery  of  ways  of 
eliminating  waste,  reducing  expense,  introducing  econo- 
mies, improving  efficiency.  New  inventions,  automatic  ma- 
chinery, standardized  production,  scientific  management, 
personnel  administration,  efficiency  systems, — all  these  and 
other  similar  efforts  are  encouraged  for  the  sake  of  keeping 


Markets — Their  Principles  and  Strategy    291 

costs  low.  Producers  are  between  the  upper  and  lower 
millstones  of  costs  and  prices  and  are  squeezed  to  death 
unless  they  keep  costs  at  safe  levels.  Marginal  producers 
are  those  who  find  it  impossible  to  benefit  from  improved 
and  cheapened  methods  of  production  as  greatly  as  do 
their  fellow  producers.  Those  who  can  reduce  costs  suc- 
cessfully make  profits ;  those  who  cannot,  live  on  the  margin 
and  barely  make  ends  meet. 

The  devices  for  holding  down  the  cost  of  supply  are  of 
many  kinds.  Not  a  few  producers  do  it  by  making  goods 
of  an  inferior  quality.  From  the  consumer's  viewpoint, 
this  practice  is  vicious.  Producers  enter  into  the  practice 
widely  nevertheless  in  the  determination,  at  all  hazards,  to 
cheapen  production  costs.  A  very  large  item  in  cost  of 
supply  is  the  cost  of  capital  tied  up  in  merchandise. 
"Small  capital,  with  rapid  turnover  of  goods,  is  the  best 
means  of  securing  merchandising  success,"  declares  an 
authority  on  marketing.^  Chain  stores  are  a  recent  in- 
novation in  marketing  and  are  designed  to  take  particular 
advantage  of  quick  turnover  of  capital.  It  is  estimated, 
for  example,  that  chain  drug  stores  turn  their  stock  over 
three  times  as  rapidly  as  independent  drug  stores,  and 
that  chain  tobacco  stores  or  grocery  stores  have  fully  as 
high  a  ratio  over  independent  stores  in  those  fields.  By 
rapid  turnover  of  goods,  chain  stores  make  one  dollar  of  capi- 
tal do  the  work  formerly  requiring  three  dollars,  and  there- 
by reduce  the  costs  of  marketing  materially.-  Approximately 
25,000  stores  are  already  organized  in  chain  systems.^ 

The  reduction  of  costs  to  proper  levels  is  in  large  meas- 
ure a  problem  in  cost  accounting.  No  storekeeper,  whole- 
saler or  manufacturer  is  in  a  position  to  reduce  costs  until 
he  knows  what  his  costs  are.  He  must  know  not  merely 
what  his  general  total  costs  amount  to;  he  most  know  the 
unit  cost  of  each  process  of  his  business,  of  each  part  and 
each  stage.  Cost  accounting  has,  until  very  recent  years, 
been  neglected  by  both  manufacturers  and   distributors. 

iC.  S.  Duncan,  "Marketing,"  p.  404. 

2  P.  W.  Ivey,  "Principles  of  Marketing,"  pp.   70-80,  23G-240. 

sNystrom,  "Economics  of  Retailing,"  pp.  216-217. 


292     Markets — Their  Principles  and  Strategy 

Investigations  by  the  Federal  Trade  Commission  and  by 
the  Harvard  Bureau  of  Business  Research  before  the  war 
disclosed  the  fact  that  neither  manufacturers  nor  retailers, 
on  the  average,  had  other  than  the  most  primitive  con- 
ception of  the  cost  of  doing  business.  Under  the  stimulus 
of  these  and  other  agencies,  much  has  been  done  to  bring 
about  uniform  cost  accounting  methods.  Cost  accounting 
shows  which  phases  of  the  business  result  in  loss  and  which 
phases  result  in  profit.  It  shows  the  general  state  of  pros- 
perity of  the  business.  Bankers  demand  to  know  in  terms 
of  accounting  statistics  the  general  state  of  the  business 
before  loans  will  be  extended.  The  whole  price  policy  of 
a  corporation  rests  upon  proper  accounting.  In  actual 
business  practice,  price  is  not  set  by  considering  cost  first, 
but  by  estimating  the  demand  possible  at  the  price  calcu- 
lated.   Then  costs  must  be  cut  to  make  the  price  feasible.^ 

By  whatever  device  costs  are  cheapened,  the  strategy  of 
cost  control  is  of  primary  concern.  The  entire  group  of 
manufacturers,  food  growers,  railroad  operators,  whole- 
salers, jobbers,  retailers  and  others  who  figure  in  the  cost 
of  supply  of  commodities  play  a  part  in  the  strategy  of 
manipulating  costs  of  selling  in  such  a  way  as  to  make  a 
profit.  All  groups  engaged  in  production  and  distribution 
are  looking  for  profits;  and  profits  are  measured  by  the 
margin  or  spread  between  costs  and  selling  prices.  The 
wider  the  spread  between  costs  and  selling  prices  at  each 
stage  of  the  process,  the  larger  the  profit.  The  safest  and 
most  serviceable  way  of  making  the  spread  wide  and  the 
profit  great  is  to  reduce  costs  of  making  and  selling 
goods  to  the  lowest  point  possible.  Into  this  strategy  every 
manufacturer  and  every  merchantman  is  pressed  to  throw 
his  best  energy  if  he  is  to  be  thoroughly  successful.  The 
tactics  of  reducing  the  cost  of  supply  are  thus  of  the  utmost 
self-interest  to  business  men  who  are  anxious  for  profits 
and  at  the  same  time  of  the  utmost  service  to  consumers 
who  are  in  need  of  goods  of  moderate  price. 

To  make  the  significance  of  a  control  of  cost  fully  clear, 
it  is  necessary  to  give  further  illustration  of  the  methods 
iSee  A.  W.  Shaw,  "Approach  to  Business  Problems,"  p.  252. 


Markets — Their  Principles  and  Strategy     293 

involved.  The  devices  for  the  restriction  of  costs  are  of  too 
many  varieties  to  receive  detailed  description  here,  but  a 
few  prominent  examples  may  be  taken  up  to  advantage. 
The  costs  of  making  and  marketing  a  very  large  number 
of  articles  are  lowered  by  undertaking  the  processes  on  a 
large  scale.  Quantity  production  commonly  means  cheap- 
ened production.  If  a  large  enough  demand  can  be  found 
or  created  to  absorb  the  full  product  of  a  large,  efficient 
factory,  utilizing  automatic  machinery  and  standardized 
production  methods,  and  operating  near  maximum  capac- 
ity the  year  around,  the  cost  of  making  each  unit  of  prod- 
uct is  substantially  lessened.  Production  policies  and 
market  policies  are  in  this  respect,  as  in  many  others,  very 
closely  correlated. 

Another  conspicuous  development  of  recent  years  in  the 
direction  of  controlling  the  costs  of  making  and  marketing 
goods  has  been  the  tendency  to  eliminate  the  middleman  in 
many  branches  of  distribution.  Integration  in  business 
organization  has  been  one  phase  of  this  tendency.  The 
United  States  Steel  Corporation,  as  an  illustration,  mines 
coal  and  iron  for  the  uses  of  the  company  mills,  owns  ships 
and  railroads,  and  in  addition  to  directing  the  manufacture 
of  steel  products,  regulates  in  considerable  measure  the 
machinery  of  distribution  of  steel  prodvicts  to  steel  users. 
Another  phase  of  the  elimination  of  middlemen  has  been 
the  policy  of  direct  selling  by  the  producer  to  the  con- 
sumer. .  In  limited  forms,  co-operative  agencies  of  distri- 
bution have  sprung  up  to  eliminate  the  middleman,  and  on 
a  surprisingly  large  scale  the  mail  order  business  has 
worked  in  the  same  direction.  In  some  lines  of  commod- 
ities the  effort  has  been  to  drive  out  the  wholesaler,  and 
to  enable  the  manufacturer  or  producer  to  deal  directly 
with  the  retailer.  In  other  commodities,  the  effort  has  been 
to  drive  out  the  retailer  as  well.  This  whole  tendency  to 
attack  the  middleman  has  arisen  partly  from  the  impres- 
sion among  consumers  that  many  middlemen  are  gougers 
and  profiteers  and  partly  from  the  desire  of  producers  to 
meet  the  needs  of  the  market  for  reduced  costs  of  distri- 
bution.    Those  who  have  been  engaged  in  the  elimination 


294     Markets — Their  Principles  and  Strategy 

of  the  middleman  have,  however,  very  commonly  made  the 
discovery  that  the  functions  which  the  old  middleman  per- 
formed were  indispensable  functions,  and  that  once  the 
old  middleman  is  eliminated,  new  marketing  machinery  has 
to  be  created  to  perform  those  functions.  The  result  is 
that  whereas  there  has  been  a  movement  in  many  lines 
to  drive  out  the  middleman,  the  substitutes  newly  created 
to  perform  the  same  functions  have  themselves  been  so 
expensive  that  marketing,  on  the  whole,  has  not  become 
less  expensive. 

A  more  significant  tendency  in  the  direction  of  con- 
trolling costs  has  been  the  effort  of  middlemen  to  perform 
the  essential  functions  of  marketing  more  efficiently,  intel- 
ligently and  economically.  The  keeping  of  standardized  cost 
accounts  has  worked  in  the  direction  of  better  planning  and 
more  efficient  organization  of  distributive  channels.  Plans 
for  reducing  the  cost  of  delivery  from  retailer  to  consumer, 
for  safer  and  cheaper  storage  of  goods,  for  proper  insur- 
ance, for  careful  control  of  rent  and  interest  charges  in 
the  business,  for  scientific  advertising,  for  scientific  sales 
management, — plans  along  these  and  many  other  lines 
seek  to  perform  the  same  indispensable  functions  of  mar- 
keting in  a  more  scientific  and  efficient  manner.  They 
are  sounder  economic  developments  than  the  illusion  about 
eliminating  the  middleman  outright. 

It  is  well  at  this  point  to  emphasize  the  fact  that  the 
attempts  of  producers  and  distributors  to  hold  costs  down 
are  not  usually  guided  by  pure  reason,  unfettered  by  bias, 
prejudice  or  inertia.  On  the  contrary,  the  producers  and 
distributors  all  along  the  line  are  hampered  by  countless 
traditions,  customs,  and  habits.  Manufacturers,  whole- 
salers and  retailers  are  alike  reluctant  to  break  away  from 
the  business  methods  of  their  fathers,  and  habit,  instinct, 
and  unconscious  social  conservatism  play  just  about  the 
same  dominating  role  here  as  in  any  other  social  structure. 
Any  number  of  manufacturers  in  the  garment  trades  were 
unwilling  to  introduce  new  machinery  which  would  greatly 
cheapen  the  cost  of  manufacturing  clothing  until  mini- 
mum wage  laws  forced  them  to  do  so  in  order  to  reduce 


Markets — Theh'  Principles  and  Strategy     295 

costs  to  a  point  "which  would  make  profits  possible  at  the 
new  wage  levels.  They  were  content  to  go  along  under 
sweatshop  conditions  until  they  were  virtually  compelled 
to  adopt  improved  methods.  The  coal  industry  exemplifies 
in  numerous  ways  the  damaging  force  of  tradition  and 
inertia  as  deterrents  to  the  adoption  of  advanced  and 
scientific  methods  of  coal  production  and  distribution.  En- 
gineers are  practically  agreed  that  more  than  100,000 
workers  are  employed  annually  in  coal  mining  that  would 
be  unnecessary  under  a  proper  management  of  the  indus- 
try. Engineers  also  point  out  that  although  American 
mines  use  machinery  to  a  much  larger  extent  than  most 
foreign  mines,  nevertheless  about  one-half  the  annual  coal 
production  of  American  mines  is  still  dug  out  without 
the  aid  of  modern  mining  machinery.  Moreover,  in  typi- 
cal mines,  fully  85  per  cent,  of  the  labor  cost  of  getting 
out  a  ton  of  coal  is  devoted  to  the  cost  of  shovelling 
coal  by  hand.  Modern  machinery  could  do  the  same 
shovelling  at  about  one-fifth  of  the  present  cost,  but  mine 
operators  fail  to  take  advantage  of  it.^  These  illustra- 
tions suggest  the  force  of  tradition,  conservatism  and  habit 
in  the  determination  of  production  costs.  The  marketing 
institutions  of  the  country  are  held  back  by  these  uncon- 
scious factors  in  shaping  the  policies  of  business  men.  The 
general  run  of  business  men  are  often  slow  to  admit  the 
advantages  of  advances  in  efficient  means  of  making  and 
marketing  goods,  because  of  the  binding  force  of  the  time- 
honored  practices  of  the  past.  Hence  the  spread  of  new 
inventions  is  often  slow,  and  the  adoption  of  improved 
methods  of  management  comes  only  as  a  very  gradual 
breaking  away  from  hard  and  fixed  habits. 

To  summarize  the  theory  of  prices  from  the  supply  side, 
the  cost  of  production  in  all  its  stages  from  the  raw  prod- 
ucts of  the  earth  to  the  finished  goods  of  the  consumer 
contributes  toward  establishing  that  minimum  below  which 
prices  cannot  for  any  length  of  time  be  allowed  to  fall. 
A  fall  below  the  cost  minimum  would  drive  out  of  business 

1  A.  J.  Mason,  American  Economic  Review  Sup.,  March,  1921, 
pp.   107-109. 


296     Markets — Their  Principles  and  Strategy 

the  producers  -whose  costs  are  highest,  the  producers  at  the 
margin,  and  would  therefore  reduce  the  supply  accord- 
ingly. But  when  costs  for  everybody  can  be  considerably 
reduced,  then  it  is  possible  for  prices  to  be  lowered  ac- 
cordingly, without  killing  marginal  producers.  At  lower 
costs  and  lower  prices  a  greater  supply  is  likely  to  be 
thrown  on  the  market,  more  people  can  afford  to  enjoy 
the  consumption  of  the  goods  affected,  and  a  new  rela- 
tionship between  marginal  cost  and  marginal  demand  is 
set  up. 

The  Analysis  and  Creation  of  Demand 

The  purposes  of  an  analysis  of  demand  are  not  merely 
to  understand  the  facts  of  demand  as  they  exist  at  any  one 
point  of  time,  but  also  to  understand  the  means  by  which 
changes  in  demand  take  place.  It  is  necessary  to  know 
what  present  demand  is  in  order  that  business  men  and 
consumers  may  adapt  themselves  to  it  and  comply  with 
its  conditions.  But  the  demand  of  the  present  is  the  product 
of  history,  it  is  the  result  of  innumerable  changes  in  human 
institutions  and  social  psychology  in  the  past,  and  it  is 
steadily  in  a  process  of  evolution  and  transformation.  By 
devices  of  one  sort  and  another,  demand  can  be  deliberately 
created  in  one  direction  and  destroyed  in  another.  Demand 
is  not  a  fixed  and  inexorable  state  of  mind,  but  for  each 
commodity  on  the  market,  demand  has  a  history  and  a 
future,  and  is  always  a  changing,  moving  force. 

The  complete  analysis  of  demand  would  be  a  compre- 
hensive task,  and  the  chief  factors  in  it  cannot  here  be 
treated  at  any  length.  However,  the  central  feature  of 
such  an  analysis  may  be  given  in  a  condensed  form.  Some 
goods, — such  necessities  as  food  and  clothing, — have  a  uni- 
versal demand  among  all  classes  of  people,  but  different 
classes  of  people  will  desire  different  grades  and  brands 
of  food  and  different  qualities  and  styles  of  clothes.  Other 
commodities,  particularly  luxuries  and  comforts,  cater  to 
particular  groups  and  classes  of  consumers.  M.  T.  Cope- 
land  describes  the  task  of  demand  analysis  among  social 
classes   as   follows,    *'^ome   of   the   considerations   to   be 


Markets — Their  Principles  and  Strategy     297 

taken  into  account  in  this  analysis  are  whether  the  product 
is  for  individual  or  family  use,  the  age  and  sex  of  the  users, 
rural  or  urban  demand,  the  occupation  of  the  users,  racial 
influences,  living  conditions  such  as  home  ownership,  the 
influence  of  climatic  conditions,  provincialisms  in  demand 
such  as  the  demand  for  left-hand  plows  in  some  districts, 
or  the  'yokel'  trade  in  clothing,  and  the  influence  of  cus- 
tom."^ Demand  analysis  is  considered  as  of  the  utmost 
importance  by  the  successful  merchants  and  dealers  whose 
special  economic  function  is  buying  and  selling.  The  force 
of  custom  in  the  buying  habits  of  each  class  or  group  of 
prospective  customers,  and  the  prevailing  peculiarities, 
notions  and  eccentricities  will  need  attention.  The  geo- 
graphical location  of  classes  and  the  distribution  of  popu- 
lation, the  history  of  the  demand  for  each  individual  com- 
modity, the  purchasing  power  and  the  amount  of  income  of 
prospective  buyers,  the  standards  of  living,  the  buying 
motives, — all  of  these  factors  along  with  many  others  re- 
quire careful  analysis  from  anyone  who  plans  to  put  goods 
on  the  market  intelligently  and  profitabl3^-  Once  the  cold 
facts  of  demand  are  understood,  the  merchant  is  in  a 
position  to  adapt  his  buying  and  selling  to  its  terms.  He 
is  equipped  with  information  which  should  enable  him 
to  modify  his  business  policies  in  ways  which  insure  that 
they  will  fit  the  needs  of  the  case. 

But  the  modern  producer  of  goods  to  sell,  and  the  mod- 
ern wholesaler  or  retailer,  makes  a  further  use  of  demand 
analysis.  He  views  demand  as  something  which  can  be 
altered  by  deliberate  manipulation.  If  there  are  goods 
which  he  wants  to  sell,  and  he  finds  no  interest  among  the 
people,  no  demand  from  the  public,  he  sets  out  to  create 
a  demand.  Demand  is  not  something  to  be  accepted  as 
in  all  respects  inevitable,  but  as  something  to  be  shaped, 
guided,  and  controlled.  Some  of  the  main  policies  for  de- 
mand control  will  be  treated  under  the  following  heads: 

(1)  plant  policy,  (2)  style  of  product,  (3)  service  features, 

(4)   advertising,   (5)  sales  management. 

1  "Marketinp  Probloms."  pp.   3-5. 

2  Duncan,  "Marketing,"  Cliapter  XIV. 


298     Markets — Tlieir  Principles  and  Strategy 

Plant  Policy 

The  policy  of  locating  the  plant  near  the  chief  market 
centers  for  any  particular  commodity  as  a  means  of  holding 
a  conspicuous  place  in  the  eyes  of  buyers  is  frequent.  The 
decision  to  locate  a  store  on  Fifth  Avenue  or  on  a  back 
street  is  important.  Whether  to  keep  the  sales  department 
and  the  production  plant  in  the  same  locality,  or  to  sepa- 
rate them  for  purposes  of  sales  strategy  is  often  a  vital 
issue.  The  type  of  plant  to  erect  for  purposes  of  showing 
off  to  visitors  is  a  matter  of  concern.  The  use  of  the  most 
modern  machinery  may,  when  it  becomes  widespread  knowl- 
edge, stimulate  demand.  In  brief,  the  location  of  the  plant, 
and  its  whole  process  of  production,  has  definite  relations 
to  the  strategy  of  creating  demand. 

Style  of  Product 

The  manufacturer,  and  often  the  retailer,  have  to  decide 
whether  to  offer  a  certain  commodity  in  bulk  or  in  pack- 
ages. The  fineness  of  quality  must  be  decided  upon.  The 
color  and  shape  and  style  of  the  commodity  will  all  influ- 
ence demand.  Whether  to  emphasize  beauty  of  construc- 
tion or  durability  will  be  a  problem.  Size  of  commodity 
units,  methods  of  wrapping,  standardization  of  quality  and 
appearance,  form  of  brand  or  trade  mark, — these  are  but 
a  few  of  the  considerations  which  enter  into  demand  crea- 
tion for  the  product.  The  satisfaction  which  consumers 
find  in  the  use  of  an  article,  and  the  appeal  which  it  makes 
to  their  minds  or  to  their  whims,  determine  whether  they 
will  want  to  buy  again  and  whether  they  will  advise  their 
friends  and  neighbors  to  buy.  A  distinct  tendency  in 
recent  years  has  been  to  prepare  articles  in  attractive  pack- 
ages, cans,  containers  or  wrappings.  Even  though  some 
addition  is  made  to  the  price,  the  public  appears  willing 
to  pay  the  extra  amount  for  the  satisfaction  of  having 
goods  in  sanitary  condition,  or  of  standardized  quality, 
or  of  attractive  appearance. 

Service  Features 

"The  service  which  properly  should  accompany  a  sale 
is  frequently  of  larger  psychological  importance  to  a  cus- 


Markets — Their  Principles  and  Strategy     299 

tomer  than  the  merchandise  itself. '  '^  A  popular  feature  of 
department  stores  is  the  service  accommodations  in  the  form 
of  rest  rooms,  writing  facilities,  musical  entertainment,  and 
restaurant  accommodations.  When  a  person  buys  an  electric 
washing  machine,  or  an  automobile,  or  a  gas  range,  it  is 
of  the  utmost  importance  that  the  buyer  shall  not  merely 
receive  the  article,  but  that  he  shall  be  shown  how  to 
operate  it,  that  services  shall  always  be  readily  available 
for  repairs,  that  if  at  any  time  the  buyer  experiences 
trouble  in  using  the  article,  the  services  of  the  seller  or 
manufacturer  shall  be  available  to  aid  him  in  correcting 
the  difficulty.  The  courtesy  of  the  company  in  render- 
ing such  services,  and  its  ability  to  make  the  customer 
feel  that  he  has  been  excellently  and  helpfully  treated 
throughout  the  transaction  have  results  measured  in  the 
good  will  of  the  customers  and  an  increased  demand  for  the 
article. 

Advertising 

What  a  buyer  wants  is  largely  a  matter  of  his  psychol- 
ogy, and  advertising  is  a  policy  of  creating  wants  and  de- 
sires by  the  application  of  psychological  principles  to  the 
ways  of  the  market.  "Psychology,  the  modern  world  has 
learnt,  is  the  chief  factor  in  salesmanship,  .  .  .  How  to 
create  a  market  .  .  .  how  to  emphasize  points  of  difference 
or  superiority  betM'een  one's  own  goods  and  those  of  com- 
petitors, how  to  create  new  vogues — ^those  are  the  difficul- 
ties that  need  the  greatest  ingenuity  to  overcome."^  The 
annual  expenditure  of  the  United  States  for  advertising 
is  put  at  about  $1,300,000,000.  This  gigantic  expense  is 
held  by  business  men  to  be  worth  while  because  it  creates 
demand  and  sells  goods  which  could  not  otherwise  be  dis- 
posed of  at  so  profitable  a  selling  price.  The  strategy  of 
creating  demand  has  developed  a  technique  of  its  own, 
also  a  body  of  economic  and  psychological  principles.  And 
so  great  have  become  the  intricacies  of  the  technique  and 

1  J.  G.  Frederick.  "The  Grecat  Game  of  Business,"  p.  78. 

2  C.  F.  Higham,  "Scientific  Distribution,"  pp.  42-105. 


300    Markets — Thew  Principles  and  Strategy 

the  principles,  that  advertising,  at  its  best,  requires  special- 
ists and  experts  in  that  field.  Large  corporations  usually 
maintain  advertising  departments,  and  the  economic  com- 
munity is  flooded  with  special  companies  Avhich  devote 
their  energies  exclusively  to  the  handling  of  advertising 
for  business  concerns  who  have  something  to  sell. 

Advertising  psychology  involves  an  appeal  to  the  domi- 
nant human  instincts.  As  explained  by  H.  L.  Holling- 
worth,  "From  the  point  of  view  of  the  advertiser,  the  im- 
portant thing  is  if  an  appeal  can  but  touch  off  one  of  these 
instinct  mechanisms  it  is  sure  of  at  once  possessing  atten- 
tion, power,  interest,  imagery,  association  and  memory 
value,  and  is  extremely  likely  to  set  up  strong  response. 
And  the  more  universal  the  instinct,  the  greater  the  like- 
lihood of  its  effectiveness.  .  .  .  Twenty  years  ago  adver- 
tisements failed  to  recognize  the  specific  character  of  in- 
stincts; appeals  tended  to  be  of  a  vague,  generalized  sort 
which  in  our  day  would  pass  unobserved  by  a  busy  public. 
But  the  present  practice  is  more  and  more  to  recognize 
the  specific  instinct  as  a  basis  of  appeal,  and  to  concen- 
trate the  appeal  strongly  on  a  single  instinct  rather  than 
to  distribute  it  among  many."^  Advertising  attempts  to 
guide  the  instinct  wants  of  men  along  desired  channels  by 
observing  the  psychological  laws  of  catching  and  holding 
attention,  of  the  association  of  ideas,  of  attracting  and  sus- 
taining interest,  of  imagery  and  sense  stimulus,  of  habit, 
imitation,  sympathy  and  suggestion.  The  greater  part  of 
advertising  does  not  present  a  chain  of  reasoning,  a  mass  of 
logic,  or  a  fund  of  evidence  and  proof.  It  works  upon  the 
instinctive  and  emotional  nature  of  people  by  the  process 
of  suggestion.  This  view  of  human  nature  is  a  primary 
faith  in  the  mind  of  the  advertising  expert.  "While  tradi- 
tion regarded  man  as  wholly  logical,  the  modern  concep- 
tion, as  already  intimated,  makes  him  largely  a  creature  of 
suggestion.  Man  has  been  called  the  reasoning  animal,  but 
he  could  with  greater  truthfulness  be  called  the  creature 
of  suggestion.    He  is  reasonable,  but  he  is  to  a  greater  ex- 

1 H.  L.  Hollin^wnrth,  "Advertising  and  Selling,"  pp.  239-240. 
See,  also,  pp.  284-285. 


Markets — Their  Principles  and  Strategy     301 

tent  suggestible."^  By  properly  putting  certain  pictures 
and  statements  about  a  commodity  before  the  eyes  of  the 
public,  and  by  repeating  the  picture,  or  a  catch  phrase  or 
a  selling  point  hundreds  and  thousands  of  times,  the  ad- 
vertiser is  able  to  crystallize  in  the  mind  of  the  buying 
public  a  spontaneous  desire  to  buy.  The  new  want  has 
the  force  of  demand  in  the  market,  and  is  a  genuine 
influence  in  determining  price  factors  and  the  relation- 
ships of  supply  and  demand. 

The  media  for  creating  this  new  demand  are  various. 
Newspapers,  magazines,  house  organs,  company  bulletins, 
circular  letters,  electric  signs,  billboards,  posters,  street- 
car cards,  window  displays,  catalogs,  souvenirs, — such  are 
some  of  the  main  channels  for  circulating  the  advertis- 
ing appeal.  Each  medium  has  special  advantages  for 
certain  forms  of  advertising  and  certain  forms  of  goods. 
The  relative  advantage  of  each  form  and  the  relative 
effectiveness  of  different  kinds  of  advertising  copy  are 
not  left  to  mere  guesswork,  but  in  the  larger  advertising 
adventures  they  are  determined  by  carefully  arranged 
experiments,  psychological  tests,  and  devices  for  measure- 
ment of  the  amount  of  buying  power  created.  Quantity 
measurement  of  psychological  results  is  relied  upon. 

The  broad  social  effects  of  advertising  are  two-sided. 
Many  of  the  wants  created  by  advertisers  divert  purchas- 
ing power  toward  goods  which  are  of  high  use  and  service 
to  consumers.  But  it  is  equally  true  that  not  infrequently 
advertising  is  used  to  catch  the  desire  of  the  masses  of  peo- 
ple, and  to  lead  them  to  pour  their  purchasing  power 
into  showy  packages,  gilded  baubles,  and  inferior  commod- 
ities. Under  the  spell  of  advertising  new  wants  spring  up 
without  the  consumer's  realizing  whence  they  came  or  why. 
The  housewife  who,  because  of  advertising,  has  been  won 
over  to  the  practice  of  buying  household  supplies  in  pack- 
ages, usually  secures  a  better  quality  of  goods  than  when 
she  bought  in  bulk.    But  "if  she  buys  standardized  goods 

1  Walter  D.  Scott,  "The  Theory  and  Practice  of  Advertising," 
Chapters   IV   and   XIV. 

See,  also,  Scott,  "Influencing  Men  in  Business," 


302     Markets — Their  Principles  and  Strategy 

in  standardized  packages,  she  will  usually  pay  from  50  to 
100  per  cent,  more  than  she  would  if  she  bought  in  bulk 
and  did  her  own  inspecting  and  selecting."^  It  is  true, 
too,  that  although  here  and  there  advertising  has  caused 
lavish  and  wasteful  expenditure,  nevertheless  "advertise- 
ments have  made  household  words  of  the  names  and  trade 
marks  of  all  the  best  commodities."  And  it  is  noteworthy 
that  "the  theme  upon  which  all  advertising  harps  is  ex- 
cellence in  some  shape  or  form,  serviceableness,  or  good 
design,  or  comfort,  or  utility  or  beauty."^  The  policy 
of  advertising  has  raised  the  general  standards  of  consump- 
tion in  terms  of  cleanliness,  quality,  sanitary  features,  and 
artistic  appearance.  Hence,  although  there  is  both  whole- 
some advertising  and  vulgar  advertising,  the  preponderant 
effect  of  a  decade  of  intensive  advertising  is  in  the  direc- 
tion of  higher  standards  of  demand  and  a  more  versatile, 
though  often  extravagant,  consumption.  The  most  hopeful 
means  of  eliminating  vulgar  and  unsocial  demand  is  not 
to  eliminate  advertising,  but  to  raise  the  standards  of  ad- 
vertising, morally,  socially  and  artistically.  Fortunately, 
the  most  powerful  advertising  concerns  in  the  country  are 
exerting  their  influence  steadily  toward  that  goal. 

Sales  Management 

The  conditions  of  the  market  require  that  a  corporation 
carefully  organize  the  selling  end  of  its  activities  with  a 
view  to  bringing  together  all  of  the  factors  which  affect 
sales  and  demand  into  a  single,  smoothly  working  unit. 
The  typical  modern  corporation  maintains  a  sales  depart- 
ment, which  helps  to  correlate  production  with  sales,  and 
integrates  all  of  the  separate  parts  of  sales  strategy  into 
a  scientific  selling  organization.  A  major  function  of  any 
sales  department  is  to  make  people  want  to  buy  goods. 
To  this  end,  the  sales  manager  and  all  those  under  him 
take  the  aggressive  in  a  campaign  to  create  an  adequate 
demand.  The  measure  of  success  for  sales  management  is 
the  volume  of  sales.     Sales  come  about,  not  by  waiting  for 

1  T.  N.  Carver,  "Principles  of  Political  Economy,"  p.  205. 
2C.  F.  Higham,  "Scientific  Distribution,"  pp.  54-61. 


Markets — Their  Principles  and  Strategy     303 

consumers  to  hunt  out  the  stores  and  factories  and  to 
go  in  search  for  goods,  but  by  going  out  into  the  market 
and  hunting  out  consumers,  and  persuading  them  to  buy 
the  goods.  No  sales  manager  would  in  normal  times  think 
that  he  had  begun  to  perform  his  duty  if  he  pursued  a 
policy  of  watchful  waiting  for  customers  to  come  to  him  to 
buy.  It  is  his  duty  to  put  the  suggestion  into  the  minds 
of  possible  buyers,  to  bring  to  bear  on  them  the  full  force 
of  the  personality  of  trained  salesmen,  in  short,  to  create 
sales. 

There  are  salesmen  of  raw  material  to  manufacturers 
of  manufactured  material  to  dealers,  jobbers,  wholesalers 
of  machinery  to  producers;  of  finished  goods  to  retailers 
and  of  retailers'  stocks  to  final  consumers.  More  and 
more,  good  salesmanship  all  along  the  line  is  being  consid- 
ered an  indispensable  economic  factor.  More  care  is  being 
paid  to  the  selection  of  salesmen,  and  scientific  tests  and 
intelligence  tests  are  being  extended  as  a  means  of  selecting 
men  who  have  the  most  native  ability  in  persuading  peo- 
ple. Psychological  qualities  of  persistence,  force  of  per- 
sonality, initiative,  alertness,  sociability,  and  aggressiveness 
are  at  a  premium  in  salesmanship.  Native  aptitude  for 
selling  is  not  however  all  that  the  salesman  needs.  He 
must  receive  also  a  training  in  the  technique  of  selling. 
Large  corporations  maintain  training  schools  in  which 
they  drill  and  educate  their  salesmen  in  the  science  of  gen- 
eral selling  principles  and  in  the  art  of  selling  the  particu- 
lar commodity  or  service  of  that  corporation.  From  time 
to  time,  salesmen  are  brought  together  in  conventions,  and 
are  inspired  and  instructed  by  lectures,  charts,  pictures 
and  conferences.  In  addition  to  training  salesmen,  mod- 
ern corporations  surround  them  wuth  incentives  to  maxi- 
mum selling  effort  by  the  use  of  prizes,  bonuses,  quotas,  and 
contests.  Instincts  of  rivalry,  display,  or  pugnacity  are 
strongly  aroused;  financial  incentives  are  vigorously  en- 
couraged ;  the  desire  for  power  and  successful  achievement 
is  sustained  by  the  ever-present  expectancy  tliat  when  a 
salesman  makes  good  consistently,  he  will  receive  promo- 
tions and  salary  increases.    In  most  lines  of  salesmanship, 


304    Markets — Their  Principles  and  Strategy 

the  financial  rewards  of  hard  and  successful  work  are  con- 
monly  higher  and  quicker  than  are  the  rewards  for  work 
requiring  a  similar  length  of  apprenticeship  in  other 
branches  of  business. 

The  crucial  test  of  salesmanship  is  the  interview  with  a 
prospective  buyer.  The  salesman's  task  is  to  create  de- 
mand in  the  potential  buyer,  and  to  convert  that  demand 
into  an  actual  sale.  "The  creative  type  of  salesman  .  .  . 
is  often  told  that  the  customer  is  not  interested  and  does 
not  see  the  need  for  the  goods.  The  creative  salesman 
then  helps  to  educate  the  prospect  to  appreciate  how  he  can 
profit  by  accepting  the  offering  made."^  He  attempts  to 
approach  his  prospect  often  by  indirect  conversation,  about 
sports  if  the  buyer  is  a  lover  of  sports,  or  about  a  hobby 
perhaps  which  he  knows  of  in  the  buyer's  make-up.  He 
endeavors  to  observe  the  favorite  convictions  of  the  buyer 
and  to  utilize  them  in  tall?:ing  up  the  goods  which  he  has 
to  sell.  The  habits,  notions,  whims,  prejudices  and  eccen- 
tricities of  the  prospect  are  sought  for  by  the  tactful 
salesman,  and  played  upon  in  the  interest  of  making  the 
sale.  A  leading  authority  on  salesmanship  advises,  ''The 
principal  qualification  of  salesmanship  is  ahility  to  close. 
.  .  .  Watch  for  the  point  when  the  resistance  of  your  pros- 
pect ceases.  This  is  commonly  called  the  'psychological 
moment '. ' '  Also  the  instructions  read  in  such  phrases  as : 
"Subtly  make  the  prospect  feel,"  "Become  politely  impa- 
tient, ' '  throw  out  ' '  a  delicate  question, ' '  and  take  the  order 
for  granted."  The  sales  department  has  justified  itself 
if,  by  all  the  arts  of  salesmanship,  it  can  sell  the  goods  to 
buyers.  That  means  arousing  demand  where  none  existed 
before,  or  redirecting  demand  into  new  channels,  or  adapt- 
ing new  goods  to  old  demands.  Good  salesmanship  sells 
more  goods  than  would  be  absorbed  without  aggressive 
creation  of  demand  in  these  ways,  and  affects  in  the  most 
profound  manner  the  meaning  of  demand  in  the  supply 
and  demand  equation.  Demand  is  not  something  which 
comes  to  him  who  waits ;  demand  must  be  coaxed  and  sug- 

ij.   G.    Frederick,   "Modern   Sales   Management,"   pp.   262-268. 
2  Ibid.,  pp.  262-268. 


Markets — Their  Principles  and  Strategy     305 

gested  and  argued  and  cajoled  into  being.  It  must  be 
manufactured  by  the  wit  and  genius  of  men  born  with 
the  gift  of  persuasion.  Only  by  that  road  is  high  business 
success  nowadays  attained.^ 

Guidance  of  the  Ratio  Between  Supply  and  Demand 

It  has  already  been  emphasized  that  neither  supply  nor 
demand  is  an  absolutely  fixed  and  unalterable  factor,  but 
that  each  is  subject  to  manipulation,  strategy,  habit,  cus- 
tom, prejudice,  and  scientific  guidance.  It  follows  that 
the  relationships  between  supply  and  demand  are  simi- 
larly subject  to  the  tactics  of  ingenious  guidance,  and  to  the 
ties  of  blind  tradition.  From  the  beginning  of  produc- 
tion to  the  end  of  consumption,  this  process  of  adjustment 
is  under  way.  As  the  English  economist,  Alfred  Marshall, 
remarks,  ' '  Production  and  marketing  are  parts  of  the  single 
process  of  adjustment  of  supply  to  demand."^ 

This  adjustment  requires  that  producers  and  distribu- 
tors should  forecast  intelligently  the  possible  demand.  The 
bulk  of  goods  are  produced  before  the  producers  know 
for  a  certainty  what  consumers  will  pay  for  them.  In  other 
words,  the  bulk  of  production  is  based  upon  a  scientific 
estimate  as  to  what  the  demand  is  most  likely  to  be.  As 
Marshall  says,  "The  constructive  trader  .  .  .  aims  high, 
and  sees  far;  he  is  constantly  forecasting  future  develop- 
ments of  demand. ' '  ^  Smaller  concerns  are  more  apt  to 
have  their  e.yes  glued  to  immediate  contracts  of  sale,  and 
to  produce  without  a  long-range  view  of  the  market.  Such 
a  branch  of  production  as  agriculture  has  a  large  element 
of  climate  and  weather  in  the  factors  which  determine  its 
volume  of  production.  But  in  such  a  branch  of  produc- 
tion, the  middlemen,  who  buy  the  grain  from  the  farmers, 
the  speculators  and  the  trade  boards,  calculate  ahead  and 
adjust  the  price  in  a  way  which  relates  the  present  or  ex- 
pected crop  supply  to  an  estimated  demand  long  in  the 
future. 

1  See  H.  D.  Kitson,  "The  Mind  of  the  Buyer." 

2  "Industry  and  Trade,"  p.   181. 
«/6irf.,  p.  47. 


306    Markets — Their  Principles  and  Strategy 

The  control  of  supply  may  take  place,  and  very  frequent- 
ly does,  through  the  common  opinion  of  separate  business 
men  in  any  line  of  industry  who  have  access  to  a  com- 
mon stock  of  market  information.  The  community  of  in- 
terest which  prevails  among  producers  and  distributors 
of  shoes  or  clothing  or  wheat  and  the  influence  of  fairly 
uniform  market  news  upon  their  individual  judgment, 
commonly  leads  to  an  unconscious  uniformity,  or  near 
uniformity,  of  opinion  as  to.  what  the  future  demand  will 
be  and  what  the  supply  should  be  to  meet  that  demand. 
Uniformity  of  business  policy  in  gauging  the  amount  that 
should  be  produced  may  thus  be  arrived  at  without  mo- 
nopolistic action  or  collusion  among  the  major  concerns  in 
a  given  line  of  industry.  As  one  authority  explains,  "It 
must  be  made  clear  that  control  of  supply  is  and  remains 
a  very  different  thing  from  monopoly,  which  is  only  an  ex- 
treme form  of  it.  Some  measure  of  control  is  necessary 
in  every  form  of  production;  but  control  of  supply  to  this 
degree  is  not  always  a  conscious  effort,  it  is  more  often 
an  automatic  and  unconscious  effort  amongst  a  whole 
group,  the  stimulus  to  which  is  received  by  each  individ- 
ual of  the  group  separately  and  distinctly  from  the  fluctua- 
tions of  price  in  his  own  particular  section  of  the  mar- 
ket."^ 

The  great  stabilizer  of  adjustments  between  production 
and  marketing,  between  supply  and  demand,  is  adequate 
market  news.  Crop  reports,  production  statistics,  interna- 
tional trade  and  production  figures, — these  are  some  of  the 
more  immediate  kinds  of  market  news.  But  in  the  larger 
sense  of  the  word,  all  news  is  market  news.  Every  politi- 
cal event,  every  religious  event,  every  educational  event 
sets  in  motion  waves  of  demand,  be  they  large  or  small, 
which  affect  market  relations.  Every  item  of  news  in  a 
newspaper  from  the  fir.st  page  to  the  last  is  market  news, 
and  significant  for  all  those  whose  livelihood  and  fortune 
depends  upon  successful  adjustments  between  supply  and 
demand.  A  number  of  Government  Bureaus  are  engaged 
constantly  in  supplying  proper  market  news.  The  Bureau 
1  Diblee,  "The  Laws  of  Supply  and  Demand,"  p.  144. 


Markets — Their  Principles  and  Strategy    307 

of  Crop  Estimates  gathers  statistics  on  the  staple  crops, 
corn,  cotton,  wheat  and  oats.  The  Bureau  of  Markets 
develops  reports  on  other  food  products.  The  Bureau  of 
Foreign  and  Domestic  Commerce  gives  statistics  bearing 
on  international  markets.  The  United  States  Geological 
Survey  presents  data  having  to  do  with  mineral  supplies. 
An  International  Agricultural  Institute,  with  headquarters 
in  Italy,  gathers  facts  on  world  agricultural  production.^ 
Private  agencies  collect  statistics  on  all  phases  of  the  mar- 
ket, and  sell  the  facts  or  give  them  to  the  market  com- 
munity. All  of  these  facilities  for  trade  information  are 
helpful  in  giving  all  parties  in  the  market  the  same  knowl- 
edge of  facts.  The  Federal  Reserve  Board  publishes  regu- 
lar bulletins  dealing  with  finance,  production  and  trade. 
The  Federal  Government  announces  in  1921  that  a  greater 
unification  of  government  news  agencies  is  under  way,  and 
the  projected  centralization  of  market  news  facilities  will 
undoubtedly  w^ork  in  the  direction  of  greater  harmony  in 
adjusting  supply  to  demand. 

But  all  such  news  would  be  of  little  avail  were  it  not 
for  the  facilities  of  modern  communication.  Market  news 
travels  around  the  world  by  wireless  or  cable,  and  per- 
meates every  nook  and  cranny  of  a  modern  country  by 
virtue  of  the  telephone  and  telegraph,  and  of  the  mail 
system.  "Adequate  overseas  communication  is  as  impor- 
tant as  ships  and  foreign  banks  to  successful  trade."- 
Nothing  would  reduce  the  whole  market  institution  to  col- 
lapse or  chaos  quicker  than  a  destruction  of  modern  elec- 
tric communication.  Napoleon's  military  dictum  that 
"Time  is  everything"  applies  with  equal  force  to  market 
news.  Telephone,  telegraph,  wireless,  cable,  and  post  of- 
fice are  the  controlling  factors  in  the  dissemination  of  mar- 
ket intelligence.  Traders  and  producers  buy  and  sell  in 
the  produce  exchanges  and  the  speculative  centers  with 
startling  rapidity  because  of  the  flashes  of  news  with 
which  electricity  supplies  them.     This  quick  and  univer- 

1  *Sfee,  also.  Annals  of  the  American  Academy  of  Political  and 
Social  Science.  Vol.  04,  pp.   100-160. 

2  Duncan,  "Marketing,"  p.  215. 


308    Markets — Theh'  Principles  and  Strategy 

sal  access  to  important  market  news  enables  all  business 
men  to  base  their  business  policies  upon  common  knowl- 
edge. Hence  market  news  tends  to  organize  and  stabilize 
the  market  along  uniform  and  common  channels. 

In  the  guidance  of  the  relations  between  demand  and 
supply,  modern  speculation  plays  a  highly  important  part. 
The  speculators  are  large  scale  buyers  of  products,  who 
make  their  purchases  because  they  have  estimated  that 
demand  some  time  in  the  future  will  enable  them  to  sell 
at  a  profit.  The  speculative  community  feeds  out  the  total 
supply  gradually  and  by  small  degrees,  for  if  the  whole 
supply  of  a  commodity,  wheat  for  instance,  were  thrust 
upon  the  market  instantaneously,  consumers  could  not  take 
up  the  supply.  Gambling,  whether  on  the  market  or  else- 
where, is  not  to  be  defended.^  But  speculation,  which 
"tends  to  increase  the  supply  of  things  where  and  when 
they  are  likely  to  be  most  wanted,  and  to  check  the  supply 
of  things  where  and  when  they  are  likely  to  be  in  less  ur- 
gent demand,"  is  of  the  utmost  service  in  keeping  the 
adjustments  of  supply  and  demand  gradual  and  smooth.^ 
Speculation  which  interprets  market  news  as  only  shrewd 
and  brilliant  experts  can  interpret  it,  and  buys  and  sells 
the  country's  or  the  world's  supply  of  a  commodity  at 
times  and  prices  which  maintain  a  steady  flow  of  goods 
toward  the  consumers  who  want  and  need  them,  is  a 
force  for  equilibrium  and  poise  in  the  market.  Speculation 
connotes  in  the  popular  mind  hazard  and  risk  on  a  gigantic 
scale.  It  is  true  that  speculation  entails  enormous  risks, 
but  the  risks  are  not  created  by  speculation.  The  risks 
exist  already.  The  risks  of  adjusting  local,  national  and 
world  supply  in  any  commodity  to  local,  national,  and 
world  demand,  exist  from  the  very  nature  of  the  circum- 
stances.^   Speculation  concentrates  the  risks  of  that  adjust- 

1  In  August,  1921,  Congress  passed  a  law  regulating  speculation 
and  the  exchanges.  The  law  restricts  gambling  features  of  dealing 
in  futures,  restricts  false  market  information,  and  aims  to  prevent 
market  manipulation. 

2  A.  Marshall,  "Industry  and  Trade,"  p.  253. 

3H.  C.  Emery,  "Speculation  in  the  United  States,"  p.  141.  "Specu- 
lation consists  in  assuming  the  inevitable  economic  risks  of  changes 
in  value." 


Markets — Their  Principles  and  Strategy     309 

ment,  but  it  does  not  create  them,  Take  away  speculation, 
and  the  risks  would  still  exist.  But  they  would  be  scat- 
tered, broadcasted  among  hundreds  of  thousands  and  mil- 
lions of  people  who  have  not  the  genius  to  shoulder  the 
risks  effectively.  The  speculator  concentrates  on  his 
shoulders  the  natural  risks  of  production  and  marketing, 
and  is  able  to  handle  the  risks  efficiently  because  of  his 
superlative  genius  for  absorbing  and  interpreting  market 
news,  and  of  making  forecasts,  with  scientific  accuracy  and 
on  a  gigantic  scale,  of  the  future  market  needs  of  the  con- 
sumers of  the  world.  The  less  difficult  adjustments  can  be 
made  by  the  interpretation  of  market  news  which  the  ordi- 
nary man  in  the  market  is  able  to  make,  and  remarkable 
uniformity  of  action  and  judgment  is  arrived  at  in  this 
commonplace  way.  But  the  greater  and  more  intricate 
adjustments  between  supply  and  demand  can  be  made 
smoothly  only  by  men  who  are  able  to  assimilate  the  vast 
amount  of  data  on  world  markets  and  who  are  willing 
to  shoulder  the  concentrated  risks  of  speculation  in  the 
hope  of  making  large  profits. 

Guidance  of  the  ratio  between  supply  and  demand 
would  be  impossible  under  the  highly  specialized  system 
of  modern  production  except  for  the  storage  facilities  which 
have  developed  in  recent  years.  Goods  cannot  be  used  as 
fast  as  they  are  produced.  Huge  quantities  are  produced 
long  distances  from  the  final  consumers,  and  facilities  must 
be  available  to  store  the  goods  until  gradually  they  can 
be  shipped  out  to  buyers  scattered  everywhere.  Food  sup- 
plies, such  as  meats,  fruits  or  vegetables,  would  perish  be- 
fore they  could  be  consumed  were  it  not  for  modern  re- 
frigeration and  cold  storage.  Grain  elevators  are  indis- 
pensable for  storing  the  grain  crop  of  the  country  until 
it  is  ready  for  the  mills.  Chicago  alone  has  grain  elevators 
with  a  capacity  of  about  45,000,000  bushels.  Seasonal  in- 
dustries require  warehouse  and  storage  facilities  to  carry 
their  goods  over  from  periods  of  surplus  production  to 
periods  of  consumption.  The  coal  industry  has  a  long 
period  of  unemployment  each  year  primarily  because  stor- 
age facilities  are  inadequate,  and  if  consumers  fail  to  buy 


310     Markets — Their  Principles  and  Strategy 

their  winter  supply  during  the  summer  months,  the  mines 
must  close  down  during  the  period  of  slack  buying.  There 
are  no  facilities  as  yet  for  adequate  storage  of  surplus 
production  until  the  winter  demand  gains  headway.  Ware- 
houses for  general  merchandise,  cotton  warehouses,  wool 
warehouses,  tobacco  warehouses,  cold  storage,  and  stock 
rooms  are  all  of  indispensable  service  in  the  adjustment  of 
supply  gradually  and  smoothly  to  demand.  Storage  facili- 
ties enable  the  men  in  the  market  to  level  out  the  supply 
over  a  period  long  enough  to  make  possible  a  proper  adapta- 
tion to  demand.  Storage  is  as  fundamental  in  modern  mar- 
ket organization  as  transportation  or  communication.  It 
performs  a  necessary  function  in  the  great  institution  of 
buying  and  selling,  and  is  indissolubly  related  with  the 
other  parts  of  the  market  mechanism. 

The  various  agencies  in  guiding  the  ratio  between  supply 
and  demand  do  not  always  act  under  free  and  easy  com- 
petition between  man  and  man.  In  fact,  perfect  freedom 
of  competition  is  the  exceptional  rather  than  the  typical 
fact  in  the  market  organization.  In  almost  every  branch 
of  buying  and  selling,  large  or  small  elements  of  monop- 
olistic control  creep  in.  Superior  access  to  choice  bits 
of  market  information  may  give  insiders  an  advantage. 
Occupation  of  strategic  centers  in  an  industry,  such  as 
refrigeration  in  perishable  products,  may  give  the  occupant 
disproportionate  influence  over  market  conditions.  In  each 
branch  of  industry,  there  is  usually  a  single  trader  or  pro- 
ducer, or  small  group  of  them,  who,  by  dint  of  the  struggles 
of  the  past,  and  their  historic  position  in  the  industry,  or 
for  other  reasons,  loom  up  as  major  factors  in  that  in- 
dustry. **As  their  position  is  so  responsible,  their  con- 
trol of  supply  is  less  automatic  than  with  small  traders, 
and  becomes  a  conscious  estimating  of  market  tendencies. 
They  become  the  brains  of  the  trade  and  to  a  large  extent 
they  fix  the  initial  prices  in  any  market,  thereby  exercising 
considerable  influence."^  The  trade  associations  in  many 
branches  of  industry  furnish  an  opportunity  for  collusion 
among  certain  parties,  who  can  then  exert  an  undue  in- 
iDiblee,  "Laws  of  Supply  and  Demand,"  pp.  145-146. 


Markets — Their  Principles  and  Strategy     311 

fluence  upon  price  adjustments  in  that  trade.  Then,  of 
course,  there  exists  here  and  there,  a  fairly  full-fledged 
monopoly,  under  which  men  hoard  foodstuffs  in  order  to 
curtail  supply  and  force  prices  up,  or  corner  a  commodity, 
or  restrict  output,  or  discriminate  unfairly  against  out- 
siders. In  many  forms  and  degrees,  monopolistic  control 
tends  to  find  some  place  in  the  market  organization.  Hence 
it  is  illusory  to  base  a  study  of  the  market  upon  the  funda- 
mental assumption  of  free  competition.  Imperfect  com- 
petition is  the  rule,  and  freedom  from  any  sign  or  degree 
of  monopolistic  interest  is  the  exception. 

Variations  from  the  General  Principles  of  the  Market 

The  principles  of  market  organization  which  have  been 
outlined  are  not  invariable  quantities.  They  do  not  explain 
all  market  phenomena,  and  not  infrequently  market  ten- 
dencies appear  which  seem  to  indicate  directly  the  opposite 
of  the  general  ruling  principles.  Generally,  a  rising  price 
will  induce  fewer  purchases,  but  when  the  rumor  is  extant 
that  the  early  increases  in  price  are  a  sign  that  prices  may 
rise  still  higher  and  probably  remain  there  for  some  time 
thereafter,  the  effect  of  the  rising  price  is  likely  to  be  an 
increased  demand  and  larger  immediate  purchases.  Buyers 
calculate  that  they  would  do  better  to  buy  quickly,  even 
though  the  price  has  ascended,  than  wait  in  vain  until 
prices  have  gone  still  higher.  To  take  another  type  of  case, 
retailers  often  find  that  buyers  refuse  to  buy  goods  which 
are  priced  low,  because  they  have  the  fear  that  low  price 
means  poor  quality.  Low  price  does  not  tend  to  in- 
crease demand  when  buyers  acquire  the  notion  that  the 
low  price  is  the  sign  of  an  article  which  is  not  worth  buy- 
ing at  any  price.  In  accord  with  the  same  market  psychol- 
ogy, a  sharp  slump  in  prices  is  apt  to  bring  what  is  known 
as  a  glut  in  the  market.  Stocks  of  goods  cannot  then  be 
sold  at  any  price.  Virtually  no  buying  takes  place,  and  the 
market  is  dead.  This  glut  occurs  in  spite  of  lowered  prices. 
Commodities  may  waste  and  decay,  crops  may  rot  on  the 
ground,  for  no  price,  however  small  it  may  be,  will  arouse 
effective  demand  among  potential  buyers.     Another  type 


312    Markets — Their  Principles  and  Strategy 

of  exception  to  the  general  working  of  market  principles 
is  the  well-known  fact  that  many  articles,  especially  new 
ones,  must  be  put  on  the  market  at  a  fairly  high  price  or 
there  will  be  practically  no  demand  at  all.  Certain  brands 
of  tea  and  tobacco,  for  example,  are  reported  to  have  been 
tried  out  in  the  market  at  moderate  prices  and  to  have  met 
with  a  negligible  demand.  Thereafter  the  same  grade  of 
commodity,  when  given  a  fancy  name  and  a  trade  brand, 
and  advertised  as  an  aristocratic  commodity,  and  when 
tagged  with  a  high  price,  has  aroused  a  large  demand  and 
brought  a  large  volume  of  sales. 

Still  another  tj^pe  of  exception,  and  one  which  has  the 
greatest  social  importance,  is  found  in  the  fact  that  in- 
creased demand  for  a  commodity  may  temporarily  increase 
price,  but  in  the  long  run,  decrease  price.  This  takes  place 
when  increased  demand  evokes  large  scale  production,  and 
large  scale  production  cheapens  production  costs.  Ameri- 
can industry  has  been  particularly  ingenious  in  developing 
quantity  production  at  low  unit  cost.  The  chains  of  five 
and  ten  cent  stores  over  the  country  give  numerous  ex- 
amples of  articles  which  formerly  sold  at  fifty  cents  or 
more,  but  which  are  now  sold  within  the  ten  cent  maximum 
because  the  stores  can  order  them  in  such  vast  quantities 
that  they  can  be  produced  cheaply  by  means  of  automatic 
machinery.^  But  none  of  these  types  of  exceptions  occurs 
on  so  vast  a  scale  as  the  exceptions  found  in  the  state  of 
consumers'  demand  during  the  various  stages  of  business 
cycles.  During  a  period  of  prosperity,  with  prices  rising, 
people  engage  in  what  seems  at  times  an  orgy  of  extrava- 
gant buying.  A  kind  of  social  craze  gets  possession  of  men's 
minds,  and  there  is  a  sort  of  herd  mania  to  buy,  buy,  buy. 
People  who  can  least  afford  expensive  goods  often  become 
the  extremists  in  the  movement,  and  common  laborers  be- 
come notorious  for  lavish  expenditure  for  silks  and  satins, 
fancy  food  and  fancy  clothes.  Rising  prices  are  no  de- 
terrent. The  gregarious  mood  buys  anyhow.  After  such 
a  storm  of  buying  has  spent  itself,  there  is  wont  to  occur 
what  is  termed  often  a  "consumers'  strike."  Prices  fall, 
lA.  Marshall,  "Industry  and  Trade,"  pp.   185-186. 


Markets — Their  Principles  and  Strategy     313 

but  people  refuse  to  buy.  The  mass  movement  swings  from 
one  extreme  to  another.  Demand  shrinks  in  spite  of  falling 
prices.  It  is  in  the  air.  A  herd  impulse  toward  economy, 
stinting,  thrift  holds  sway.  Neither  the  era  of  extrava- 
gance nor  the  era  of  stinting  is  a  rational  phenomenon. 
The  only  clue  to  it  is  the  gregarious  instinct  and  the  so- 
cial psychology  which  received  treatment  in  the  first  sec- 
tion of  this  volume. 

The  exceptions  to  the  principles  normally  dominant  in 
market  processes  are,  primarily,  temporary  exceptions. 
They  are  occasional  diversions,  for  the  time  being,  from  the 
worn  and  beaten  paths  of  market  laws.  The  fundamental 
principles  of  market  organization  are  long  run  principles 
and  pivotal  principles.  This  explanation  is  necessary  in 
order  that  students  may  have  clearly  in  mind  the  pro- 
portions and  relations  between  the  fundamental  market 
principles  and  the  seeming  exceptions  to  them. 

The  Mechanism  of  the  Market 

The  market  is  an  institution  which  involves  not  merely 
an  underlying  social  psychology  and  a  set  of  operating 
principles,  but  also  a  mechanism  of  purchase  and  sale. 

Some  features  of  this  mechanism  have  already  been 
described  and  interpreted.  Transportation,  communica- 
tion, storage,  credit  and  banking, — each  of  these  is  an  in- 
dispensable part  of  the  grand  clockwork  of  the  market 
mechanism.  Take  any  one  of  these  integral  parts  of  the 
market  mechanism  away,  and  the  whole  construction  would 
lie  motionless  and  helpless.  These  particular  parts  of  the 
market  mechanism  are  explained  elsewhere  in  this  volume 
and  there  is  no  need  to  enter  into  further  detailed  descrip- 
tion of  these  parts  of  the  mechanism  at  this  point. 

Market  Mechanism  Geographically  Considered 

Other  parts  of  the  market  mechanism  need,  however,  to 
be  considered,  and  first  of  all,  the  mechanism  may  be  looked 
at  from  a  geographical  viewpoint.  From  one  geographical 
standpoint,  it  is  useful  to  realize  that  there  are  local  markets, 
primary  markets,  and  terminal  markets.     Local  markets 


31 4     Markets — TJieir  Principles  and  Strategy 

are  illustrated  by  the  local  buying  agencies  for  farm 
products.  Local  stores  buy  part  of  the  local  product  and 
sell  it  for  local  consumption.  Local  commission  merchants 
or  representatives  of  large  dealers  from  central  markets, 
buy  the  bulk  of  the  produce  and  transport  it  where  desired. 
The  price  paid  the  producer  will  be  gauged  ordinarily  by 
the  dealer's  calculations  based  upon  the  price  procurable 
in  a  primary  market,  with  proper  allowances  for  shipping 
cost  and  dealer's  profit.  The  large  meat  packers  estimate 
the  price  at  which  meat  can  be  sold  to  dealers  and  con- 
sumers, and  then  figure  the  price  which  they  can  afford  to 
offer  stock  raisers  in  each  local  market  for  their  meat  ani- 
mals.^ Local  cotton  prices  paid  to  growers  are  largely 
calculated  from  prevailing  prices  on  the  Liverpool  cotton 
market.  In  such  commodities,  the  producer  must  look  out 
for  his  costs  as  best  he  can.  Price  determination  starts 
from  a  calculation  of  what  the  goods  can  be  sold  for  in  the 
big  markets,  and  local  prices  in  such  lines  "are  often  de- 
termined by  deductions  from  the  central  market  price.  "^ 
Local  prices  of  other  commodities,  of  coal  for  example, 
are  primarily  determined  by  starting  with  the  cost  of 
production,  and  adding  a  certain  profit.  Small  and  in- 
dependent producers  are  apt  to  be  in  a  position  where 
they  have  to  accept  whatever  price  is  set  by  large  dealers. 
Their  local  prices  are  largely  determined  for  them  by  out- 
siders over  whom  they  have  scant  control  and  whose  rea- 
sons for  price  offerings  they  cannot  hope  to  understand. 

Primary  markets  are  the  concentration  points  for  buyers 
and  sellers  in  each  particular  line  of  goods.  Chicago  is  a 
center  of  food  products.  Wool  markets  head  up  in  New 
York,  Boston,  Philadelphia,  Portland  and  San  Francisco, 
but  not  in  Chicago.  Iron  and  steel  concentrate  in  such 
cities  as  Pittsburgh  and  Birmingham.  Each  branch  of 
goods  has  its  unique  central  markets  where  large  dealers, 
wholesalers,  jobbers,  speculators  come  together  and  buy 
and  sell  in  large  lots.    Each  branch  of  goods  has  a  history 

1  G.  E.  Putnam,  Journal  of  Political  Economy,  Vol.  XXIX,  pp.  297, 
663-675. 

2  Duncan,  "Marketing,"  p.  230. 


Markets — Their  Principles  and  Strategy     315 

of  its  own  in  developing  its  individual  market  centers,  and 
a  set  of  traditions,  customs,  habits,  and  folkways  clusters 
around  the  processes  of  each  center. 

The  terminal  markets  likewise  vary  for  each  separate 
type  of  goods,  but  ordinarily  are  located  near  the  sea- 
board or  national  border.  They  are  the  great  buying  cen- 
ters for  international  traders.  They  have  developed  in  cer- 
tain great  trading  centers  through  a  considerable  period 
of  history,  and  can  be  understood  in  each  case  only  in  light 
of  this  historical  background. 

The  economics  of  market  geography  should  also  be  looked 
at  from  the  viewpoint  of  retailers,  and  thought  of  in  terms 
of  city,  suburban  and  country  districts.  The  great  depart- 
ment stores,  chain  stores,  and  individual  stores  concen- 
trate in  the  larger  cities  of  the  country.  The  great  centers 
where  the  consumers'  purchasing  power  is  spent  lie  in  the 
shopping  districts  of  such  cities  as  Boston,  New  York, 
Philadelphia,  or  Chicago.  Fancy  styles  and  Vide  va- 
rieties for  selection  are  prominent  features  of  the  shopping 
sections  of  the  city  centers.  In  the  suburban  districts  and 
the  rural  districts,  more  relative  prominence  goes  to  con- 
sideration of  serviceability  of  goods  and  stability  of  styles. 
Different  occupational  conditions  in  the  various  sections 
affect  the  kinds  and  quantities  of  goods  demanded.  Age 
and  sex  of  population  in  various  trade  regions  affect  the 
standards  of  consumption. 

Market  Mechanism  Functionally  Considered 

The  market  mechanism  should  also  be  considered  from  a 
functional  standpoint.^  Varying  types  of  market  organiza- 
tion have  come  into  being  to  perform  certain  needed  func- 
tions. Wholesalers,  jobbers,  commission  men,  brokers,  re- 
tailers perform  functions  of  indispensable  value,  and  play 
necessary  parts  in  the  whole  market  mechanism.  Market- 
ing functions  are  likewise  performed  by  bankers,  transpor- 
tation companies,  storage  companies  or  insurance  concerns, 
but  we  are  here  concerned  particularly  with  interpreting 

1  See  A.  W.  Shaw,  "Some  Problems  in  Market  Distribution." 


316     Markets — Their  Principles  and  Strategy 

the  mechanism  of  those  groups  popularly  known  as  "the 
middlemen." 

Middlemen  are  those  people  who  perform  buying  and  sell- 
ing functions  in  the  process  of  getting  goods  from  pro- 
ducers to  consumers.  They  are  specialists  in  purchasing 
goods  from  producers  or  owners,  and  in  distributing  them 
toward  the  consumer.  The  bridge  between  producers  and 
consumers  is  often  a  long  one,  and  the  risks  of  crossing  it 
are  many.  Middlemen  take  the  risks  and  control  goods 
in  the  journey  from  maker  to  user,  for  the  purpose  of  mak- 
ing a  profit.  A  wholesaler  buys  large  lots  of  commodities, 
usually  from  a  variety  of  producers.  He  collects  goods 
from  scattered  sources,  and  in  turn  sells  them  to  other 
middlemen  nearer  to  consumers.  A  producer  of  grocery 
products  may  have  no  facilities  for  getting  his  products 
into  the  hands  of  hundreds  of  thousands  of  retailers  the 
country  over.  The  wholesaler,  however,  has  built  up  an 
organization  for  that  specific  purpose,  and  so  when  he  buys 
the  grocei*y  products  from  the  producer  and  distributes 
them  to  the  multitudinous  retail  stores  of  the  country 
through  a  trained  sales  force,  he  helps  the  producer  to  land 
his  goods  in  the  final  market,  and  he  helps  the  consumer 
to  procure  the  goods  produced  by  the  remote  and  unknown 
manufacturer.  Because  of  his  middle  position,  the  whole- 
saler is  in  a  position  to  analyze  carefully  the  output  and 
capacity  of  producers,  and  the  wants  and  demands  of  con- 
sumers. He  is  in  control  of  the  mechanism  which  harmo- 
nizes makers  and  users  of  goods.  A  typical  retail  grocery 
store,  carrying  in  the  neighborhood  of  1000  brands  of 
goods,  stands  in  need  of  a  wholesale  dealer  who  carries, 
through  a  single  office,  orders  for  practically  any  of  the 
thousand  different  brands.  The  wholesaler  buys  these 
many  brands  from  scores  and  hundreds  of  producers,  as- 
sembles them,  develops  suitable  storage  facilities,  sorts, 
grades  or  packs  them,  and  provides  a  suitable  selling  ma- 
chinery for  placing  them  in  the  hands  of  the  retailers  of 
the  country. 

Although  this  in  general  states  the  ordinary  mechanism 
of  getting  goods  from  producers  to  consumers,  there  are 


Markets — Their  Principles  and  Strategy     317 

several  important  variations.  Many  manufacturers  prefer 
to  ignore  outside  middlemen  entirely  and  to  dispose  of  their 
goods  direct  to  the  retailers.  Some  manufacturers  establish 
their  own  retail  stores,  and  dispose  of  part  or  all  of  their 
products  through  these  company-controlled  stores.  A  few 
manufacturers  attempt  to  eliminate  both  wholesaler  and 
retailer  and  sell  direct  to  the  consumer.  Some  retailers, 
such  as  department  stores,  prefer  commonly  to  buy  direct 
from  the  manufacturer  in  large  lots.  The  mechanism  varies 
widely  with  each  separate  line  of  goods.  For  instance,  it 
is  estimated  that  about  75  per  cent,  of  all  furniture  is  sold 
by  the  manufacturer  direct  to  the  retailer,  whereas  about 
90  per  cent,  of  groceries  go  through  the  wholesalers'  chan- 
nels.^ Each  branch  of  industry  has  a  distributive  mechan- 
ism with  many  individual  peculiarities  which  have  grown 
up  over  a  considerable  period  of  history,  and  these  peculi- 
arities of  each  branch  are  just  as  important  to  note  as  the 
fundamental  common  characteristics  of  the  market  mech- 
anism in  general. 

Within  recent  years,  new  mechanisms  for  retailing  have 
grown  into  prominence.  Department  stores,  chain  stores, 
and  mail  order  stores  are  the  chief  types  of  these  new  re- 
tailers. The  economies  of  buying  goods  in  large  lots  direct 
from  manufacturers  give  these  new  type  retailers  some- 
thing of  an  advantage  in  competition  with  ordinary  retail- 
ers. The  use  of  extensive  advertising,  of  standardized 
goods,  of  rapid  turnover,  and  of  scientific  principles  of 
management  has  enabled  these  new  types  of  retail  mech- 
anism to  win  a  secure  footing  in  the  competitive  field. 

In  the  gap  between  producers  and  consumers,  the  mech- 
anism of  organized  exchanges  has  come  to  be  of  vital  im- 
portance. Produce  exchanges  provide  open  trading  places 
for  perishable  provisions  such  as  vegetables,  fruits,  butter, 
eggs  or  poultry.  Grain  exchanges  provide  similar  trading 
opportunities  for  corn,  oats,  wheat,  rye,  hay  and  the  like. 
Special  exchanges  are  maintained  for  cotton  and  for  coffee 
and  for  sugar.    To  these  exchanges  come  special  buyers  and 

1  See,  for  further  illustration,  Nystrom,  "Economics  of  Retail- 
ing," pp.   36-40. 


318    Markets — Their  Principles  and  Strategy 

traders  "who  are  experts  in  market  information,  and  who 
buy  and  sell  largely  on  the  basis  of  their  scientific  or  per- 
sonal guesses  as  to  what  the  future  prices  will  be.  The 
conditions  of  the  exchange  are  regulated  and  supervised, 
and  buyers  and  sellers  of  large  quantities  of  products  can 
come  together  to  match  their  best  judgments  on  the  ques- 
tion of  the  future  course  of  prices.  Because  the  dealers  on 
the  exchanges  are  specialists  and  experts,  they  bring  to 
bear  in  the  most  intelligent  way  the  forces  of  supply  and 
demand,  and  the  prices  prevailing  on  the  exchanges  are  or- 
dinarily the  best  indicators  of  the  shrewdest  judgment  of 
competent  minds  on  the  future  relations  between  supply 
and  demand.  The  risk  that  the  judgment  of  traders  will 
turn  out  to  be  wrong  introduces  a  strong  speculative  ele- 
ment into  their  activities,  but  this  very  speculative  element 
tends  to  steady  prices  by  concentrating  the  risks  of  the 
market  in  the  hands  of  those  most  able  to  interpret  them 
and  to  bear  their  responsibilities  and  dangers.^ 

Price  Movements  in  Various  Stages  of  the  Market 
Process 

The  prices  of  the  market  are  unstable  matters,  and  their 
fluctuations  occur  in  different  degrees  and  at  different 
speeds  in  the  various  parts  of  the  market  mechanism.  Retail 
prices  fluctuate  more  slowly  and  less  violently  than  whole- 
sale prices.  During  a  period  of  prosperity,  wholesale  prices 
rise  earlier  and  faster  and  higher  than  retail  prices;  and 
during  a  period  of  depression  and  falling  prices,  wholesale 
prices  fall  earlier,  and  faster,  and  lower  than  retail  prices. 
Moreover,  prices  of  raw  materials  and  of  producers'  goods 
in  the  wholesale  market  tend  to  fluctuate  more  sharply  than 
do  the  prices  of  consumers'  goods.  In  general,  the  reason 
for  these  broad  differences  in  price  movements  is  found  in 
the  fact  that  producers  and  wholesalers  are  more  sensitive 
to  changing  conditions  of  supply  and  demand,  are  more 
immediately  in  touch  with  market  information,  and  are 
quick  to  act  in  line  with  that  information;  whereas  con- 
sumers are  slow  to  realize  changed  conditions  of  supply  and 
iSee  S.  S.  Huebner,  "Annals,"  XXXVIII,  No.  2,  pp.  321-341. 


Markets — Their  Principles  and  Strategy     319 

demand,  and  are  influenced  in  the  prices  which  they  are 
willing  to  pay  more  by  custom,  habit,  and  inertia.  A 
further  explanation  is  found  in  the  fact  that  a  retailer's 
stock  of  goods,  if  bought  just  before  a  fall  in  prices  on  the 
wholesale  market,  must  be  sold  at  a  price  which  will  allow 
him  a  profit.  The  retailer  must  figure  on  the  basis,  not  of 
what  he  could  buy  the  goods  for  now  at  the  fallen  whole- 
sale prices,  but  on  the  basis  of  what  he  paid  for  them  at  the 
high  level  previously  prevailing.  This  one-stage  remove 
from  the  wholesaler  makes  it  natural  that  the  retailer's 
prices  should  follow  rather  than  lead  those  of  the  whole- 
saler.^ This  tendency  of  retail  prices  to  lag  behind  whole- 
sale prices  has  been  clearly  illustrated  in  the  price  fall  of 
1920-1921.  Official  reports  of  the  Federal  Government 
have  made  it  evident  that  in  any  number  of  lines  of  com- 
modities, retail  prices  were  still  high,  weeks  and  months 
after  wholesale  prices  had  suffered  a  sharp  decline.  Such 
lagging  movements  of  retail  prices  usually  furnish  the  oc- 
casion for  accusations  that  retailers  are  deliberately  taking 
advantage  of  consumers,  and  sustaining  prices  at  unreason- 
able levels  for  purposes  of  profit-making. 

Price  Policies 

The  entire  discussion  of  the  institution  of  market  values 
and  prices  up  to  this  point  carries  firmly  the  inference  that 
all  of  the  factors  in  that  institution  are  capable  of  a  highly 
significant  degree  of  guidance  and  control.  However  fun- 
damental the  principles  of  supply  and  demand  may  be, 
nevertheless  there  is  large  room  within  them  for  ingenuity, 
strategy  and  manipulation  between  buyers  and  sellers. 
Hence  a  realistic  study  of  market  prices  must  give  care- 
ful attention  to  price  policies.  Price  policies  represent  the 
sagacity  and  shrewdness  of  the  men  in  the  market  in  their 
attempts  to  make  profitable  adjustments  of  prices  within 
the  limits  set  by  the  broad  principles  of  price  and  value. 

Prices  are  often  thought  of  as  amounts  set  by  laws  of 
supply  and  demand.  While  it  is  true  that  within  limits, 
prices  are  set  by  supply  and  demand,  it  is  equally  true  that 
iW.    C.   Mitchell,   "Business    Cycles,"   pp.   93-134. 


320    Blarhets — Their  Principles  and  Strategy 

within  limits  price  policies  can  bring  about  new  quantities 
of  supply  or  of  demand.  Price  policies  originated  by  a 
shrewd  man  of  the  market  are  capable  of  changing  pro- 
foundly the  amount  of  goods  which  people  will  demand. 
It  is  imperative  therefore,  for  a  balanced  view  of  market- 
ing institutions,  to  observe  some  of  the  ways  in  which  de- 
liberately created  price  policies  can  and  do  transform  fun- 
damental supply  and  demand  relationships.  Supply  and 
demand  determine  prices,  and,  conversely,  price  policies  de- 
termine supply  and  demand. 

Price  policies  may  be  classified  on  the  basis  of  their 
relation  to  that  price  level  in  any  branch  of  goods  which 
is  termed  the  market  level.  The  market  level  is  what  the 
name  implies,  the  prevailing  price  average  in  any  branch 
of  goods,  the  general  price  which  obtains  throughout  the 
greater  part  of  the  market.  To  the  extent  that  some  de- 
gree of  real  competition  still  operates  in  a  particular  kind 
of  goods,  the  general  market  price  for  those  goods  will  tend 
to  keep  close  to  their  marginal  cost  of  production.  It  will 
be  remembered  that  marginal  cost  of  production  is  the 
cost  which  prevails  among  that  fringe  of  producers  of  any 
line  of  goods  whose  costs  are  highest.  To  the  extent  that 
genuine  competition  asserts  itself,  it  tends  to  force  prices 
down  constantly  to  a  level  just  about  even  with  the  costs 
of  those  producers  for  whom  production  is  so  expensive 
that  they  can  scarcely  make  ends  meet  and  can  scarcely 
afford  to  operate  their  plants.  Any  further  reduction  of 
prices  would  force  them  to  produce  at  a  loss,  and  so  drive 
them  out  of  business,  and  reduce  the  supply  of  goods  to 
that  amount.  But  in  the  modem  business  organization, 
perfect  competition  throughout  the  market  is  a  rare  phe- 
nomenon. To  the  extent  that  privilege,  monopoly  advan- 
tage, unfair  or  imperfect  competition,  characterize  a  branch 
of  business,  the  prevailing  market  price  will  fail  to  be  driven 
down  to  the  marginal  cost  of  production.  The  ''normal 
price"  of  orthodox  economic  theory  is  the  price  even  with 
the  marginal  cost  of  production,  and  hence  "normal  price" 
assumes  a  fairly  full  degree  of  free  competition.  Inas- 
much as  the  day  of  full  and  free  competition  is  practically 


Markets — Their  Principles  and  Strategy     321 

past,  and  the  new  order  obtains  in  which  each  branch  of  the 
market  is  governed  by  partial  competition  and  partial 
monopoly  advantages,  it  is  clear  that  so-called  "normal 
price"  has  become  virtually  a  myth  of  free  competition 
theorists.  The  ordinary  market  price  of  the  present  order 
is  under  the  influence  of  association,  combination,  agree- 
ment, monopoly,  privilege,  and  co-operation,  and  so  varies 
somewhat  from  '* normal  price,"  and  tends  commonly  to 
be  somewhat  above  it. 

A  business  man  in  the  market  looks  around  him  and  ob- 
serves that  the  going  price,  the  prevailing  price  for  his  line 
of  goods,  is  at  a  certain  level.  He  can  formulate  his  own 
price  policy  along  either  of  three  different  pathways. 
First,  he  can  try  to  put  his  goods  on  the  market  at  a  price 
somewhat  below  the  market  level;  second,  he  can  offer 
them  at  the  market  level;  third,  he  can  attempt  to  dispose 
of  them  at  a  price  somewhat  above  the  market  level.  The 
deliberate  adoption  of  either  of  these  price  policies  will 
have  marked  consequences  upon  the  basic  conditions  of 
supply  and  demand. 

Below  the  Market  Level 

A  new  manufacturer  entering  a  branch  of  business  in 
which  the  market  is  already  well  occupied  will  find  difficulty 
as  a  new-comer  in  disposing  of  the  full  product  of  his  plant. 
As  a  means  of  persuading  buyers  to  break  old  habits  and 
sever  old  connections,  he  may  offer  to  sell  at  a  lower  price. 
His  great  selling  argument  will  be  that  his  product  is  just  as 
good  as  that  which  sells  for  more,  but  the  price  is  cheaper. 
He  appeals  to  the  business  judgment  of  buyers  to  buy  high 
grade  goods  at  a  reduced  price.  This  argument  is  an  effort 
to  undermine  the  confidence  of  buyers  in  a  standard  brand 
of  product  with  which  they  have  been  made  familiar  in  the 
past  through  advertising,  salesmanship,  or  experience. 
The  new  article  must  break  down  the  old  wall  of  buying 
habits  by  its  appeal  of  lower  price.  It  is  frequent  for 
manufacturers  who  desire  to  invade  established  lines  of 
specialties  which  are  well  known  in  the  market  by  trade 
marks  and  brands,  to  put  their  new  goods,  similar  in  use 


322     Markets — Their  Principles  and  Strategy 

and  purpose,  up  against  the  established  lines  at  low  prices. 
The  handicap  which  the  new  goods  have  because  they  lack 
the  reputation  of  the  trade-marked  brands  is  overcome  hy 
underselling  the  regular  lines  of  goods.  Many  middlemen 
nowadays  buy  goods  in  bulk  from  producers,  and  put 
special  brands  of  their  o^vn  on  the  goods,  and  then  sell  the 
goods  at  shaded  prices.  They  are  able  in  this  way  to  build 
up  a  good  will  for  the  new  articles,  through  the  use  of 
dealers'  trade  marks,  at  the  same  time  that  they  initiate 
the  goods  into  the  regular  market  by  offering  them  at  low- 
ered prices. 

Other  manufacturers  invade  an  established  market  by 
offering  a  grade  of  goods  Avhich  is  cheaper  to  make  because 
it  leaves  off  all  frills  and  fancy  work,  and  which  appeals  to 
a  class  of  customers  who  care  more  for  utility  than  for  looks. 
The  plainly  made  goods  can  be  sold  at  lower  prices  than  old 
lines  in  the  market,  and  hence  can  draw  into  the  market  new 
groups  of  consumers  who  will  buy  goods  of  plain  style  pro- 
vided only  the  goods  will  give  them  the  service  which  they 
desire.  Illustrations  would  be  found  in  the  marketing  of 
cheaper  grades  of  furniture,  and  of  low  priced  automobiles. 
The  policy  of  many  retail  stores,  particularly  department 
stores,  of  dealing  in  "seconds,"  is  an  application  of  the 
same  general  policy.  Silk  shirts  or  silk  stockings  with 
slight  imperfections  are  offered  as  just  as  good  to  wear  as 
perfect  articles,  and  a  great  deal  cheaper. 

It  happens  from  time  to  time  that  manufacturers  of  long 
experience  decide  to  expand  their  sales  by  adopting  a  new 
policy  of  a  price  scale  below  the  general  market  level.  The 
business  man  who  assumes  this  change  of  policy  has  to 
calculate  as  carefully  as  possible  the  elasticity  of  the  de- 
mand for  his  particular  kind  of  product.  For  some  com- 
modities, such  for  example  as  staple  foods,  lowered  prices 
may  increase  demand  somewhat,  but  there  is  a  close  limit 
to  the  amount  of  food  which  people  can  eat,  and  demand 
might  not  extend  greatly  in  response  to  lowered  prices.  For 
other  commodities,  lowered  prices  might  extend  demand 
enormously.  However,  even  in  these  branches  of  goods,  a 
point  would  be  reached  at  which  demand  elasticity  would 


Markets — Their  Principles  and  Strategy    323 

come  to  a  halt.  Below  that  point  lowered  prices  would  not 
call  forth  a  commensurate  amount  of  demand.  It  is  a  dif- 
ficult problem  to  ascertain  for  each  different  commodity 
where  this  point  lies.  Demand  elasticity  is  a  fundamental 
consideration  with  producers  who  lower  prices  for  the  sake 
of  evoking  an  increased  volume  of  sales. 

Another  variation  of  the  lowered  price  policy,  and  a 
highly  significant  one,  appears  in  the  price  policies  of  many 
sections  of  the  retail  market.  Each  retailer  in  any  given, 
community  is  anxious  to  draw  as  much  trade  to  himself  as 
possible,  and  often  the  most  fruitful  means  of  attracting 
trade  is  some  form  of  "cut  price"  policy.  Chain  stores 
and  department  stores  are  often  able  to  sell  some  standard 
article,  or  a  substitute  article,  at  a  cut  price,  and  where  the 
policy  can  be  carried  out,  it  is  held  to  be  good  publicity. 
Bargain  sales,  bankruptcy  sales,  fire  sales,  etc.,  offer  fre- 
quent supplies  of  goods  at  sharply  reduced  prices.  Many 
retailers  make  it  a  practice  to  single  out  some  two  or  three 
commodities  to  be  advertised  for  sale  at  bargain  prices. 
These  "leaders"  attract  the  consumer  to  the  stores,  and 
while  the  consumer  is  in  the  presence  of  a  wide  variety  of 
other  goods,  he  is  tempted  to  buy  things  which  he  had  not 
contemplated  buying  when  he  came  to  the  store.  As  a  rule, 
of  course,  w^hat  the  retailer  loses  by  the  cut  price  on  the 
"leaders,"  he  has  to  make  up  at  some  other  point  in  his 
business.  Hence  the  seeming  immediate  advantage  which 
the  buyer  of  the  cut  price  article  has,  does  not  reflect  a 
general  social  gain  to  all  consumers.  The  cut  price  policies 
in  the  hands  of  large  retail  stores,  department  stores,  or 
chain  stores  are  capable  of  being  used,  and  not  infre- 
quently are  used,  to  drive  small  competitors  out  of  busi- 
ness. 

As  a  means  of  combating  the  vicious  effects  of  cut 
price  retailing  when  misused,  producers  of  standardized, 
trade  marked  goods  have  widely  attempted  what  is  known 
as  "the  price  maintenance"  policy.  Under  this  policy,  re- 
tailers are  required  to  sell  goods  at  standard  prices.  If  a 
retailer  obstinately  cuts  prices,  the  producer  can  thereafter 
refuse  to  sell  the  retailer  a  further  supply  of  the  brand  of 


324)     Markets — Their  Piind'ples  and  Strategy 

goods.  This  tacit  ultimatum  which  the  producer  holds  out 
to  the  retailer  has  for  the  most  part  proved  adequate  to 
coerce  retailers  into  offering  the  goods  to  consumers  at  the 
standard  prices.  Although  the  policy  in  some  respects 
subjects  the  retailers  to  an  arbitrary  control  at  the  hands 
of  producers,  yet  at  the  same  time,  the  retailers  are  usually 
assured  of  a  standard  price  which  is  high  enough  to  allow 
for  a  reasonable  rate  of  profit,  and  they  are  relieved  of  the 
fear  that  some  powerful  retailer  in  the  community  may  at 
any  moment  destroy  the  trade  of  the  mass  of  retailers  by 
drawing  all  purchases  of  a  particular  brand  of  article  unto 
himself,  through  a  vigorously  advertised  cut  price  policy. 
The  cut  price  policy  when  applied  to  standardized  goods,  is 
capable  of  serving  as  a  ruthless  measure  of  cutthroat  com- 
petition, and  the  recent  development  of  price  maintenance 
is  a  move  in  the  direction  of  regularizing  and  stabilizing 
the  retail  market.^  Price  cutting  results  in  temporary  leaps 
of  demand  here  and  there,  but  price  maintenance  acts  in 
the  direction  of  an  even,  organized,  steady  demand.^ 

A  further  policy  of  selling  at  prices  below  the  general 
market  level  appears  in  the  custom  of  buying  at  inside 
prices.  This  policy  occurs  most  conspicuously  in  the  pur- 
chases made  by  retailers  from  dealers  and  producers.  Re- 
tailers who  can  buy  in  large  quantities  often  demand  that 
the  producers  shall  quote  them  a  special  price  below  the 
general  level.  Some  manufacturers  and  dealers  graduate 
their  selling  prices  according  to  the  quantities  bought; 
others  give  special  inside  prices  to  large  quantity  buyers 
adapted  to  the  advantages  of  each  particular  case.  Sales- 
men often  find  it  necessary  to  split  their  commissions  with 
buyers  in  order  to  effect  sales.     Some  buyers  are  quoted 

1  See  Nystrom,  "Economics  of  Retailing,"  Chapter  XV. 

2  The  United  States  Supreme  Court,  in  the  case  of  Colgate  and 
Company,  decided  that  it  was  legal  to  refuse  to  sell  goods  to  retailers 
who  would  not  resell  at  standard  prices.  In  January,  1922,  the 
Court  decided  the  price  maintenance  policy  of  the  Beech  Nut  Pack- 
ing Company  unfair  and  illegal  because  it  aimed  to  spy  upon  cut- 
rate  dealers,  to  coerce  jobbers  as  well  as  retailers,  and  to  make  a 
list  of  "undesirables"  to  be  denied  future  supplies  of  goods.  The 
decision  was  by  a  five-to-four  vote,  and  the  lines  of  difference  be- 
tween fair  and  unfair  price  maintenance  are  indistinct. 


Markets — Their  Principles  and  Strategy    325 

the  regular  price,  but  are  given  a  bonus  of  extra  goods, 
a  form  of  concession  which  is  the  equivalent  of  an  outright 
price  reduction.  Concessions  in  the  form  of  liberal  dis- 
count terms  are  used  to  discriminate  in  favor  of  certain 
buyers.  All  such  price  discrimination  tends  to  handicap 
the  small,  independent  retailer,  and  to  give  the  edge  of  ad- 
vantage to  the  retailers  who  can  buy  on  a  large  scale.  It 
is  a  potential  weapon  for  unfair  competition,  and  because 
of  the  possible  secrecy  in  dealing  at  inside  prices,  it  is  a 
difficult  weapon  to  subject  to  adequate  public  control. 
The  forms  of  public  control  are  as  yet  indistinct,  but  the 
market  conditions  created  by  inside  price  policies  are  such 
as  to  make  it  important  that  ways  and  means  be  devised 
for  a  proper  safeguard  against  their  misuse  in  unfair  com- 
petition. A  careful  authority  has  stated:  "As  matters 
now  stand,  the  inside-price  problem  is  the  most  disturbing 
element  in  business.  More  of  the  evils  of  unfair  trade 
can  be  traced  to  this  as  a  cause  than  to  any  other  single 
item."^ 

At  the  Market  Level 

The  very  fact  that  there  is  a  general  market  level  pre- 
supposes that  a  substantial  body  of  buying  and  selling 
is  done  at  that  level.  Business  men  who  sell  at  the  market 
level  cannot  attract  trade  by  arguing  that  their  goods  are 
cheaper  than  the  goods  of  their  competitors.  The  incentive 
of  cheapness  cannot  be  appealed  to.  Hence  it  becomes 
necessary  to  build  up  a  large  demand  by  appealing  a  great 
deal  to  non-financial  incentives.  Just  as  it  has  been  found 
that  wage  workers  yield  to  other  incentives  than  purely 
financial  ones,  so  it  is  apparent  that  consumers  are  stim- 
ulated to  buy  through  other  incentives  than  cheapness. 
The  superior  quality  of  the  goods,  the  artistic  appearance 
of  packages,  the  suggestive  force  of  good  advertising,  the 
personal  selling  power  of  trained  salesmanship, — all  of 
these  factors  aid  in  building  up  trade  for  dealers  who  are 
selling  at  the  market  level.     Good  will  is  capable  of  de- 

iNystrom,  "Economics  of  Retailing,"  p.  299. 


326    Markets — Their  Principles  and  Strategy 

velopment  by  many  other  means  than  cheap  prices.  Ser- 
vice, courtesy,  efficiency,  promptness  are  non-financial 
pathways  of  creating  market  reputation,  and  increasing 
sales  for  specially  adept  dealers.  Competitors  who  wish  to 
increase  their  sales,  but  who  sell  at  the  market  level,  rely 
therefore  upon  a  demand  induced  by  non-financial  services 
and  strategies. 

Above  the  Market  Level 

It  is  a  frequent  policy  nowadays  to  offer  goods  at  prices 
which  are  conspicuously  high.  When  this  policy  is  adopted, 
the  reliance  upon  a  demand  created  by  non-financial  tactics 
is  carried  to  an  extreme.  Goods  priced  above  the  market 
level  ordinarily  require  heavy  advertising,  careful  sales- 
manship, and  the  use  of  brands  and  trademarks.  People 
who  can  be  induced  to  buy  expensive  brands  are  wont  to 
pride  themselves  often  on  the  fact  that  they  secure  peculiar 
excellence  and  extraordinary  service.  They  enjoy  con- 
spicuous extravagance,  and  often  secure  satisfaction  from 
wearing  expensive  clothes  or  consuming  expensive  f®od 
simply  because  their  friends  and  rivals  will  know  that  the 
things  are  expensive.  Superior  price  is  a  suggestion  that 
the  goods  are  bought  by  superior  people,  and  the  instincts 
of  display,  rivalry  and  self-assertion  are  particularly  vul- 
nerable to  appeals  of  that  sort.  Consumers'  demand  is 
created  for  the  benefit  of  dealers  who  carry  luxuriant  goods 
at  luxuriant  prices,  and  who  boast  of  the  reputation  of  sell- 
ing only  at  top-notch  prices.  Of  course,  .different  classes 
of  people  are  limited  by  their  various  incomes  in  the  ex- 
tent to  which  they  can  succumb  to  the  incentives  to  con- 
spicuous extravagance.  However,  of  late,  particularly 
favored  members  of  the  groups  dependent  upon  wage  in- 
comes have  taken  to  imitating  the  more  well-to-do  classes, 
and  many  of  them  have  become  notorious  for  their  lavish 
expenditure  on  high  priced  brands  of  clothes,  furniture, 
foods  and  the  like.  The  type  of  appeal  which  brings  about 
this  si'.uation  rests  substantially  upon  the  use  of  trade 
brands.  There  is  no  other  means  by  which  to  single  out  a 
particular  dealer's  goods  from  the  general  run  of  goods, 


Markets — Tlieir  Principles  and  Strategy     327 

and  attract  unusual,  permanent  attention  to  them.  The 
tactics  of  creating  demand  for  high  priced  goods  by  the  use 
of  advertised  brands  is  mainly  a  matter  of  understanding 
social  psychology.  Dealers  who  can  cultivate  shrewdly  the 
instinctive  demands  of  people  who  are  heavily  susceptible 
to  psychological  traits  of  display,  prestige,  imitation,  ri- 
valry, pride,  vanity,  ostentation,  and  suggestion  hold  a 
clue  to  the  building  of  a  market  for  their  wares  at  prices 
well  above  the  general  market  level. 

Business  Combinations  and  High  Price  Policies 

The  extremes  of  the  form  of  price  policy  just  enumer- 
ated usually  appear  among  the  specialties,  and  only  the 
milder  forms  usually  among  the  staple  necessaries  of  life. 
But  among  both  classes  of  commodities,  and,  in  fact, 
throughout  the  market  organization  from  end  to  end,  there 
is  a  tendency  to  the  development  of  forms  of  trade  combina- 
tion and  association  which  are  frequently  connected  with 
high  price  policies.  Monopolies  are  supposedly  the  most 
guilty  perpetrators  of  price  exactions  above  a  reasonable 
market  level.  An  examination  of  some  of  the  price  aspects 
of  business  combinations,  trade  associations,  and  monopo- 
lies is  closely  concerned  therefore  with  the  whole  problem 
of  price  strategy  and  marketing  institutions. 

The  concentration  of  industrial  and  trade  control  in  re- 
cent years  is  explained  more  fully  in  the  chapter  on  Man- 
agement. It  is  important  at  this  point  to  consider  the 
movement  toward  business  combination  primarily  from 
the  standpoint  of  its  influences  on  price  policies  and  market- 
ing functions.  The  modern  market  is  neither  freely  com- 
petitive nor  completely  monopolistic.  Whichever  of  the 
hundreds  of  separate  branches  of  industry  and  trade  may 
be  chosen  for  investigation,  it  is  quickly  found  that  there  is 
both  an  element  of  competition  and  an  element  of  monopoly. 
Partial  competition  and  partial  monopoly  characterize 
virtually  all  fields  of  trade.  Monopoly,  therefore,  is  always 
a  question  of  degree.  The  extent  to  which  competition  re- 
mains and  the  forms  which  it  takes  vary  strikingly  from 
industry  to  industry.     One  hundred  per  cent,  monopoly 


328    Markets — Their  Principles  and  Strategy 

and  one  hundred  per  cent,  competition  are  equally  hard  to 
find.  It  is  always  a  question  of  more  or  less,  and  the  pro- 
portions vary  from  month  to  month  and  year  to  year  in 
each  field  of  trade.  The  nearest  approach  to  full  monopoly 
occurs  in  such  fields  of  natural  monopoly  as  railroads,  pat- 
ented articles,  and  municipal  water,  gas  or  electricity  sup- 
ply. But  even  in  these  branches  of  natural  monopoly, 
there  are  limits  to  monopolistic  power,  and  if  these  limits 
do  not  always  appear  in  terms  of  potential  competition, 
they  then  present  themselves  in  terms  of  public  regula- 
tion.^ After  a  detailed  examination  of  many  forms  of 
business,  C.  K.  VanHise  draws  the  broad  conclusion:  "The 
foregoing  description  of  the  situation  cannot  but  convince 
any  man  who  will  look  the  facts  in  the  face  that  the  blind 
faith  that  prices  are  adequately  controlled  by  competition 
in  the  United  States  is  no  longer  justified,  if  indeed  it  ever 
was  justified.  Unrestrained  competition  does  not  as  a 
matter  of  fact  exist  for  many  articles,  except  to  a  very 
limited  degree  at  the  present  time.  Everj'where  there  is 
restraint  of  trade  by  agreement  or  combination,  either  law- 
ful or  unlawful."  A  comprehensive  view  of  the  new  eco- 
nomic situation  is  given  by  Woodrow  Wilson  as  follows : 
' '  There  is  one  great  basic  fact  which  underlies  all  the  ques- 
tions that  are  discussed  on  the  political  platform  at  the 
present  moment.  That  singular  fact  is  that  nothing  is  done 
in  this  country  as  it  was  done  twenty  years  ago.  We  are  in 
the  presence  of  a  new  organization  of  society.  We  have 
changed  our  economic  conditions  absolutely  from  top  to 
bottom." 

Monopoly  in  all  forms  and  degrees  is  typically  char- 
acterized by  a  control  over  prices,  and  this  price  control  is 
made  possible  by  control  of  supply.  "A  partial  monopoly 
exists,"  says  Carver,  "whenever  an  organization  exercises 
sufficient  control  over  the  supply  of  anything  to  enable  it  to 
fix  its  prices,  even  with  a  narrow  zone,  independently  of 
competition."-     Concentrated  business  estimates  the  price 

lA.   Marshall,   "Industry   and   Trade,"   pp.    394-402. 

2  Carver.  "Principles  of  Political  Economy,"  p.  201.  See,  also. 
Ely,  "Outlines  of  Economics,"  pp.  200-201 ;  Hanay,  "Business  Organi- 
zation and  Combination,"  p.  141. 


Markets — Their  Principles  and  Strategy    329 

at  which  a  certain  quantity  of  goods  can  be  sold  to  yield 
the  highest  net  profit,  and  proceeds  to  produce  or  contract 
for  only  that  limited  supply  Large  businesses,  like  small 
businesses,  aim  ordinarily  to  charge  ''all  that  the  traffic 
will  bear,"  But  large  businesses  are  in  a  position  usually 
to  heighten  the  figure  which  "the  traffic  will  bear"  by  re- 
fusing to  sell  the  supply  which  it  controls  except  at  its  fixed 
price.  If  the  monopoly  uses  discretion  in  setting  its  price, 
and  avoids  overdoing  the  price-raising  policy,  it  will  or- 
dinarily be  successful  in  selling  its  goods  at  the  increased 
figure.  In  weak  monopoly  organizations  the  limits  within 
which  monopoly  price  can  be  held  up  are  especially  narrow. 
In  some  of  the  stronger  monopolies,  price  exactions  for 
short  periods  of  time  can  often  be  pushed  up  surprisingly 
high.  The  degree  of  price  control  will  vary  widely  from  in- 
dustry to  industry,  and  the  variation  is  in  fairly  close  pro- 
portion to  the  degree  of  control  over  supply. 

Theoretically,  monopoly,  complete  or  partial,  should  be 
able  to  elevate  prices,  and  in  the  popular  mind,  monopoly 
suggests  profiteering  prices  more  vividly  than  anything 
else.  It  is  a  moot  question  therefore:  Has  monopoly,  as  a 
matter  of  historical  fact,  actually  raised  prices?  The  an- 
swer has  to  be  two-sided :  some  monopolies  have  taken  full 
advantage  of  their  price  fixing  powers  and  have  reaped 
exorbitant  harvests;  some  have  effected  large  savings  and 
economies  in  production,  and  have  thereby  made  possible 
reductions  in  consumers'  prices  without  themselves  suffer- 
ing inroads  upon  profits.  Some  concrete  evidence  on  the 
issue  is  available  in  the  studies  of  J.  "VV.  Jenks,  based  largely 
upon  the  findings  of  the  United  States  Industrial  Com- 
mission,^ and  of  subsequent  government  records  on  indus- 
try. His  reports  show  the  margin  between  costs  and  selling 
prices  both  before  and  after  monopoly  powers  existed. 
This  spread  indicates  whether  the  public  was  given  full 
advantage  of  economies  of  business  combination,  and 
whether  prices  were  maintained  for  any  length  of  time  at 

i"The  Trust  Problem,"  Chapter  VII.  Published,  1900;  Revised, 
1912. 


330    Markets — Their  Principles  and  Strategy 

monopoly  levels.     The  following  extracts  and  digests  from 
his  conclusions  are  highly  valuable: 

1.  Sugar  Monopoly. — "The  sugar  combination  has  be- 
yond question  had  the  power  of  determining  for  itself, 
within  considerable  limits,  what  the  price  of  sugar  should 
be,  low  or  high,  with  or  without  competitors.  ...  On  the 
whole,  the  chart  seems  to  make  it  perfectly  evident  that  the 
sugar  combination  has  raised  the  price  of  refined  sugar  be- 
yond the  rates  in  vogue  during  the  period  of  active  com- 
petition before  the  formation  of  the  Sugar  Trust,  and  the 
two  competitive  periods  during  its  existence." 

"From  the  time  of  the  organization  of  the  Trust  in  1887, 
for  twelve  or  thirteen  years  the  Trust  kept  the  margin  high 
for  more  than  three-quarters  of  the  time.  Since  that 
period,  the  margin,  it  will  be  noted  has  steadily  remained 
considerably  higher  than  during  the  period  of  most  vig- 
orous competition  in  the  few  years  preceding  the  organ- 
ization of  the  Trust,  and  during  the  two  periods  of  vigor- 
ous competition  since  that  time.  .  .  .  Although  they  have 
made  excellent  profits  during  the  last  few  years,  the  mar- 
gin certainly  during  the  last  three  or  four  years  can  hardly 
be  said  to  be  abnormal."  However,  in  relation  to  the  gen- 
eral price  level  of  all  commodities,  sugar  prices  are  not 
higher.  Prices  of  other  commodities  from  1900  to  1914 
show  a  greater  increase  than  do  sugar  prices.  "The  total 
result  seems  to  indicate  that  if  the  sugar  combination  in 
the  United  States  has  had  any  direct  influence  upon  the 
price  of  sugar,  it  has  been  rather  to  reduce  that  price  than 
to  increase  it." 

2.  Petroleum. — "The  Standard  Oil  Trust  was  formed 
in  1882.  From  that  time  on  for  a  period  of  eight  or  nine 
years,  there  was  only  a  slight  decrease  in  the  margin." 
From  1892  to  1894,  the  margin  fell  considerably  lower,  and 
up  to  1916,  the  prevailing  margin  was  not  up  to  the  low 
point  of  1894.  "Taking  the  period  as  a  whole,  .  .  .  from 
1900  to  date  (1916)  it  will  be  seen  that  this  great  combina- 
tion, as  practically  all  of  the  others,  seems  not  to  have 
raised  the  price  of  its  chief  product  to  an  amount  that  cor- 
responds to  the  rise  in  the  price  of  general  commodities." 


Markets — Tlieir  Principles  and  Strategy     331 

These  facts  of  themselves  do  not  adequately  tell  the  story 
of  monopoly  in  petroleum.  The  dividends  paid  on  the  out- 
standing capital  stock  were  in  the  neighborhood  of  30  to 
48  per  cent,  annually,  and  the  charges  brought  against  the 
Standard  Oil  Company  which  resulted  in  its  dissolution  by 
a  decision  of  the  Supreme  Court  in  1911  mentioned  "enor- 
mous and  unreasonable  profits."  The  Bureau  of  Corpora- 
tions in  an  investigation  in  1904  and  1905  found  that  ''The 
Standard  discriminates  greatly  in  fixing  prices  in  different 
sections  and  in  different  towns,  charging  extortionate 
prices  where  there  is  no  competition  and  cutting  prices 
sharply  where  competition  is  active.  .  .  .  The  profits  of 
the  Standard  Oil  Company,  particularly  on  its  domestic 
business,  are  altogether  excessive,  and  they  have  been 
higher  during  recent  years  than  formerly.  The  real  source 
of  the  Standard's  power  is  not  found  in  the  rendering  of 
superior  service  to  the  public,  but  in  the  long  continued 
use  of  unfair  methods  of  competition."  After  the  dissolu- 
tion, Standard  Oil  oil  stock  quickly  rose  more  than  three 
hundred  points,  indicating  the  faith  that  the  dissolution 
would  not  impair  the  industry's  power  to  earn  large 
profits.  Federal  Trade  Commission  reports  indicate  that 
oil  profits  during  and  after  the  war  were  highly  liberal. 

3.  Steel. — The  United  States  Steel  Corporation  was 
formed  in  1901.  According  to  Jenks,  "After  the  formation 
of  the  United  States  Steel  Corporation  ...  a  new  policy 
seems  to  have  been  adopted — that  of  seeking  good  profits, 
but  not  extraordinary  ones.  .  .  .  The  effect  of  the  United 
States  Steel  Corporation  seems  to  have  been  primarily  to 
steady  prices  and  to  maintain  more  nearly  a  rate  of  prices 
of  the  finished  product  dependent  upon  the  costs  of  the 
leading  raw  materials  so  far  as  that  can  be  readily  deter- 
mined." Steel  prices  have  not  moreover  risen  as  much  in 
the  period  1900-1914  as  the  prices  of  commodities  in  gen- 
eral. In  spite  of  these  facts,  a  study  of  earnings  and  prices 
of  the  Steel  Corporation  seems  to  warrant  the  brief  conclu- 
sion stated  by  Van  Hise,  "Excessive  prices;  these  have 
resulted  in  enormous  earnings."  ^  The  war  years  brought 
1  "Concentration  and  Control,"  p.  140. 


332    Markets — Their  Principles  and  Strategy 

generous  profits  to  the  steel  combination.  The  Federal 
Trade  Commission  found  that  the  profits  of  the  United 
States  Steel  Corporation  rose  from  about  $77,000,000  in 
1912  to  over  $478,000,000  in  1917. 

These  brief  comments  indicate  a  wide  variety  of  effects 
of  business  combinations  on  prices  and  profits.  In  many- 
cases,  the  lines  of  industry  in  which  a  high  degree  of  com- 
bination has  prevailed,  have  maintained  prices  lower  rela- 
tively than  the  average  prices  of  all  commodities.  Never- 
theless, the  predominant  fact  has  been  liberal  profits,  often 
excessive  profits,  made  possible  in  large  degree  by  the  ability 
of  leading  corporations  to  influence  prices.  Jenks  con- 
cludes that  "The  result  has  been  to  establish  fairly  gener- 
ally the  business  policy  of  not  attempting  to  secure  any- 
thing like  a  complete  monopoly  of  the  market,  but  rather 
for  the  combination  to  fix  its  prices  at  such  a  rate  that  it 
may  secure  under  normal  conditions  substantial  profits 
while  its  competitors  are  still  able  to  live  and  prosper."^ 
Court  decisions  have  generally  confirmed  the  charges  of 
unwarranted  price  policies  and  industrial  investigating 
commissions  have  reported  to  the  same  effect.  Economists 
for  the  most  part  take  a  stand  essentially  similar  to  that  of 
J.  A.  Hobson  when  he  declares,  "But  a  trust  is  always 
able  to  charge  prices  in  excess  of  competitive  prices,  and 
it  is  generally  its  interest  to  do  so,"^  and  that  of  R.  T.  Ely, 
when  he  writes,  "The  conclusion  which  we  reach  then  is 
that  monopoly  prices  are  generally  higher  than  competi- 
tive prices.  .  .  .  The  higher  the  average  of  well-being,  and 
the  more  readily  they  spend  money,  the  higher  will  be 
that  price  which  will  yield  the  largest  net  returns.  "We 
have  these  conditions  meeting  in  the  United  States.  We 
have  a  high  average  of  well-being,  and  a  great  readiness 
in  the  expenditure  of  money,  and  consequently  we  have 
a  high  monopoly  price.  "^    Large  combinations  of  capital 

1  "The  Trust  Problem,"  p,  178. 

2  "Evolution  of  Modern  Capitalism,"  p.  160. 

3  EIv,  "Monopolies  and  Trusts,"  136-137.  See,  also,  Taussig, 
"Principles  of  Economies,"  Vol.  II,  pp.  112-113:  J.  B.  Clark  and 
J.  M.  Clark,  "Control  of  Trusts,"  12-13;  Van  Hise.  "Concentration 
and  Control,"  p.  84;  Jenks  and  Hammond,  "Great  American  Issues," 


Markets — Their  Principles  and  Strategy     333 

have  been  exceedingly  reluctant  to  pass  on  to  consumers 
the  full  benefit  of  economies  and  efficiencies  of  production. 
Experience  has  taught  monopolies,  partial  or  otherwise, 
the  expediency  of  exercising  monopoly  influences  over 
prices  within  much  narrower  limits  than  were  attempted 
during  the  period  of  first  formation  of  great  business 
combinations. 

Business  combinations  have  developed,  moreover,  a  prac- 
tical method  of  adapting  price  policies  to  all  classes,  grades 
and  varieties  of  consumers.  Each  grade  of  consumer  is 
offered  a  grade  of  commodity  particularly  calculated  to 
stimulate  demand  in  that  level  of  consumers.  In  almost 
all  kinds  of  commodities,  some  people  want  the  very  best, 
some  want  the  best,  some  want  a  good  grade,  some  want 
"seconds."  Some  want  fancy  style,  some  want  utility, 
some  want  certain  combinations  of  the  two.  The  price 
which  each  grade  of  consumer  can  be  persuaded  to  pay 
for  the  most  attractive  grade  of  goods  is  a  matter  for 
painstaking  calculation.  Instead  of  using  the  advantage 
of  its  great  influence  in  determining  a  single  price,  the 
partial  monopoly  frequently  gives  its  attention  to  work- 
ing out  a  set  of  prices  to  cover  the  demands  of  varieties  of 
consumers.  Instead  of  a  uniform  monopoly  price,  a  scale 
of  monopoly  prices  takes  the  field,  each  catering  to  a  special 
class  of  buyers,  and  figured  on  the  basis  of  "all  the  traffic 
will  bear ' '  for  that  class.  Often  the  so-called  superior  grade 
of  goods  is  only  something  of  about  the  same  quality, 
dressed  up  in  a  finer  appearing  package,  and  bearing  an 
aristocratic  brand.  The  superfine  article  must  radiate  a 
certain  atmosphere  of  cxclusiveness  in  order  to  appeal  to 
exclusive  people,  and  must  exhibit  an  elite  style  in  order  to 
arouse  buyers  of  fastidious  tastes.  With  the  quality  and 
style  of  the  various  grades  of  goods  nicely  calculated,  prices 
are  attached  which  should  attract  enough  buyers  to  absorb 
the  quantity  offered  by  the  business  combination.  More- 
over, corporations  have  sometimes  attempted  to  formulate 

p.  167;  Haney,  "Business  Organization,"  p.  137;  Macrosty,  "Trust 
Movement  in  British  Industry,"  pp.  335-337;  E.  Jones,  "Trust  Prob- 
lem in  the  United  States,"  Chapter  XI. 


334     Mai'kets — Their  Principles  and  Strategy 

price  policies  which  would  take  advantage  of  the  fact  that 
some  buyers  can  afford  to  pay  more  for  the  same  article 
than  others  can.  This  principle  found  its  greatest  accept- 
ance probably  in  the  rebates  of  railroads.  The  railroads, 
before  drastic  regulation  took  effect,  made  it  a  common 
practice  to  charge  different  shippers  different  freight  rates 
for  the  same  railroad  service.^  The  price  policy  may  thus 
easily  become  what  each  individual  will  bear,  or  what  a 
group  of  individuals  of  a  certain  grade  will  bear,  instead 
of  what  the  general  traffic  will  bear.  This  gradation  of 
prices  to  suit  gradations  of  buyers  is  an  innovation  accom- 
panying large  scale  business,  and  is  primarily  attributable 
to  the  discovery  by  the  monopolist  or  semi-monopolist  that 
only  by  such  a  device  can  he  reap  the  largest  net  gains. 

Monopoly  Price  and  What  the  Traffic  Will  Bear 

The  monopoly  price  for  each  grade  of  goods,  or  the 
monopoly  price  for  all  the  articles  in  an  ungraded  indus- 
try, is  the  outcome  of  an  elaborate  mathematical  calcula- 
tion. A  large  quantity  of  goods  selling  at  a  moderate  price 
may  yield  more  net  profit  than  a  small  quantity  of  goods 
selling  at  a  high  price.  Monopoly  price  is  not  the  highest 
price  at  which  some  goods  can  be  sold,  but  is- the  price  which 
■will  sell  that  quantity  of  goods  yielding  the  largest  net 
profit.  Assume  a  commodity  which  costs  one  dollar  to  pro- 
duce. If  the  selling  price  is  made  $1.50,  the  total  sales  may 
be  1000  articles.  The  net  gain  would  therefore  be  $500. 
But  assume  the  price  is  put  at  $1.40,  and  that  at  this  lower 
price  the  volume  of  sales  is  1500.  Obviously  the  net  gain 
at  the  lower  monopoly  price  is  $600.  This  illustration  will 
suggest  the  fact  that  a  multitude  of  combinations  can  be 
figured  out,  and  that  some  one  combination  of  selling  price 
and  volume  of  sales  will  yield  the  maximum  net  revenue. 
Generally  speaking,  large  business  combinations  prefer  to 
lean  toward  as  small  a  volume  of  sales  as  possible  at  as  large 
a  price  as  possible,  in  so  far  as  that  is  not  inconsistent  with 
the  maximum  net  gain  for  the  industry.     Enormous  pro- 

lEefer  to  A.  Marshall,  "Industry  and  Trade,"  pp.  415-417,  for 
further  explanation.  See,  also,  Ely,  "]\Ionopolies  and  Trusts,"  pp, 
108-118. 


Markets — Their  Principles  and  Strategy    335 

duction  at  the  lowest  possible  prices  is  not  sought  after  so 
much  as  limited  production  at  prices  high  enough  to  yield 
liberal  net  profits.  This  fact  has  been  the  basis  for  the 
repeated  accusation  brought  by  production  engineers  that 
"if  we  could  harvest  more  dollars  by  producing  fewer 
goods,  we  produced  the  fewer  goods.  "^  To  the  extent  that 
this  policy  is  in  vogue,  it  brings  a  private  net  gain  at  the 
expense  of  a  net  social  loss.  It  is  scientific  restriction  of 
production  which  yields  maximum  business  profits  but 
which  furnishes  society  with  too  few  goods  at  too  high 
prices.  Hence,  to  charge  what  the  traffic  will  bear  is  a 
policy  which  is  capable  of  bringing  either  social  good  or 
harm,  according  as  it  is  applied. 

Monopolies  and  the  Steadying  of  Prices 

A  frequent  price  achievement  under  large  scale  business 
is  the  steadying  of  prices.  For  example,  from  1901  to  1916, 
the  United  States  Steel  Corporation  maintained  the  price  of 
steel  rails  steadily  at  $28  a  ton.  Other  large  corporations 
make  it  a  policy  to  raise  prices  somewhat  more  slowly  than 
the  general  market  rise  during  a  period  of  increasing  prices, 
and  to  lower  prices  less  swiftly  and  less  sharply  in  a  period 
of  falling  prices.  Industrial  combinations  w^hich  own  and 
control  their  own  sources  of  raw  materials,  such  as  coal  or 
iron  mines,  are  particularly  able  to  steady  their  selling 
prices  because  they  are  in  a  position  to  regulate  their  costs 
of  production  more  evenly.  Some  semi-monopolistic  cor- 
porations, however,  have  an  unsteadying  effect  on  prices. 
For  instance,  from  time  to  time  a  newly  formed  combina- 
tion seeks  to  establish  itself  in  the  good  graces  of  buyers  by 
starting  out  with  a  price  below  the  market  level.  After  a 
certain  amount  of  good  will  is  built  up,  the  combination 
stealthily  elevates  its  prices  to  all  that  the  traffic  will  bear. 
In  the  course  of  the  transition,  the  other  producers  and 
dealers  in  the  field  are  face  to  face  with  anything  but  a 
steadying  influence.  Another  class  of  big  combinations  has 
been  found  to  fix  their  prices  so  extremely  high  that  the 

1  H.  L.  Gfintt,  "Or<ianizinj?  for  Work,"  p.  24.  See,  also,  Van  Hise, 
"Concentration  and  Control,"  p.  85,  and  Jenks,  "The  Trust  Problem," 
p.  63. 


336     Markets — Their  Piinciples  and  Strategy 

exorbitant  profits  have  invited  competitors  to  enter  the  field. 
Then  has  ensued  a  price  war  and  cutthroat  competition,  all 
of  which  has  caused  prices  to  go  down  from  the  former 
great  heights  to  a  point  equal  to  the  cost  of  production,  and 
even  for  a  time  below  the  cost  of  production.  It  is  safe  to 
state,  however,  that  this  condition  of  violent  price  fluctua- 
tions occurred  principally  in  the  early  years  of  experience 
of  business  combinations,  and  that  the  experience  thus 
dearly  bought  has  persuaded  many  business  leaders  to  avoid 
extremes  of  monopoly  price  likely  to  invite  new  competitors 
to  engage  in  bitter  price  wars.  On  the  whole,  therefore,  the 
later  periods  of  large  scale  business  have  been  marked  by 
an  endeavor  to  exert  a  steadying  influence  on  price  levels, 
and  to  avert  violent  fluctuations. 

Price  Discrimination 

The  price  policies  of  monopolies  and  of  partial  monopo- 
lies have  often  been  gauged  with  a  view  to  destroying  com- 
petitors. One  of  the  most  notorious  and  destructive  forms 
of  price  discrimination  has  been  local  price  cutting.  Using 
this  device,  a  large  business  combination  seeks  to  drive  out 
of  business  its  competitors  in  a  given  locality  by  putting  the 
local  selling  price  extremely  low,  even  below  the  cost  of 
production.  The  combination  makes  up  for  its  loss  in  the 
competitive  locality  by  charging  a  higher  price  for  its  com- 
modities throughout  the  rest  of  the  country.  After  the  local 
competitor  has  been  driven  out  of  business  by  the  ruinously 
low  local  prices,  the  monopoly  comes  into  control  of  the 
local  market,  and  can  then  boost  the  local  prices  to  all  that 
the  traffic  will  bear,  without  fear  of  opposition.  The  his- 
tory of  the  American  Tobacco  Company  and  of  the  Stand- 
ard Oil  Company  is  replete  with  illustrations  of  these 
death-dealing  price  attacks  on  local  competitors.  A  careful 
survey  of  the  policies  of  the  country's  greatest  monopolies 
led  Louis  Brandeis,  now  a  Justice  of  the  Supreme  Court,  to 
declare  in  1913,  "Americans  should  be  under  no  illusions 
as  to  the  value  or  effect  of  price  cutting.  It  has  been  the 
most  potent  weapon  of  monopoly — a  means  of  killing  the 
small  rival  to  which  the  great  trusts  have  resorted  most 


Markets — Their  Principles  and  Strategy    337 

frequently."  Price  cutting  is  now  declared  illegal  when 
the  purpose  of  it,  whether  avowed  or  concealed,  is  to  sub- 
stantially lessen  competition  or  tend  to  create  a  monopoly. 

There  are  other  devices  that  have  been  widely  practiced 
which  have  the  common  purpose  of  crushing  small  competi- 
tors. The  operation  of  bogus  "independent"  concerns,  in 
reality  branches  of  a  concentrated  corporation,  enables  the 
large  concern  to  camouflage  its  real  purpose  of  killing  com- 
petitors. The  cutting  of  prices  below  costs  on  certain 
"leaders"  or  "fighting  brands"  often  is  an  effective  way  of 
driving  rivals  out  of  business,  particularly  when  the  rival 
is  largely  dependent  upon  that  particular  brand  of  com- 
modity for  his  profits  and  when  it  is  only  an  incidental 
brand  in  the  traffic  of  the  big  combination.  Other  large 
concerns  have  found  it  exceedingly  destructive  of  competi- 
tion to  insist  that  dealers  who  wish  to  buy  certain  articles 
will  not  be  allowed  to  buy  the  desired  articles  unless  they 
also  buy  certain  other  articles  for  which  the  large  producers 
wish  to  force  a  market.  Some  producers  will  not  sell  to 
dealers  unless  they  agree  to  sell  only  that  line  of  article, 
and  no  other.  Rebates  from  regular  prices  are  sometimes 
offered  to  dealers  for  pushing  with  special  vigor  the  brands 
of  one  producer  to  the  exclusion  of  those  of  his  rivals.  The 
attitude  of  the  law  and  the  courts  toward  these  and  other 
similar  practices  of  price  discrimination  has  generally  been 
to  consider  them  devices  of  unfair  competition.  The  Clay- 
ton Anti-Trust  Act  of  1914,  legislating  with  regard  to  the 
most  menacing  of  these  forms  of  price  discrimination,  laid 
down  a  broad  test  for  determining  what  is  fair  and  what 
unfair.  It  condemned  price  discriminations  "where  the 
effect  of  such  discrimination  may  be  to  substantially  lessen 
competition,  or  tend  to  create  a  monopoly  in  any  line  of 
commerce."^ 

Mechanism  for  Exertion  of  Monopoly  Influences  on 
Price  Policies 

The  business  mechanism  for  exerting  monopoly  price  in- 
fluences varies  widely.    In  some  lines  of  commerce,  definite 

1  See  Section  2  of  the  Act.  Also  W.  H.  S.  Stevens,  "Unfair  Com- 
petition," Political  Science  Quarterly,  pp.  282,  460. 


338    Markets — Their  Piindples  and  Strategy 

centralization  of  management  occurs,  and  trusts,  corpora- 
tions, holding  companies,  mergers,  and  amalgamations  take 
the  place  of  former  separated  establishments.  The  common 
principle  in  such  business  concentration  is  a  definite  cen- 
tralization of  management.  Plants  and  companies  which 
formerly  were  independent  and  sovereign  become  branches 
of  a  centralized  management.  Price  policies  in  such  com- 
panies are  formed  by  the  central  management,  and  the  con- 
stituent companies  and  plants  direct  their  price  policies  in 
compliance  with  the  uniform  policies  laid  down  by  the  cen- 
tral management.  There  is  another  great  class  of  price 
agreements  in  the  nature  of  understandings  entered  into 
between  independent  companies.  Each  branch  of  industry, 
each  line  of  commerce,  each  field  of  production,  almost 
without  exception,  has  a  business  association  of  some  sort. 
These  associations  serve  a  great  many  purposes,  some  of 
them  constructive  and  some  tending  toward  the  fixing  of 
excessive  prices  and  the  undue  restraint  of  trade.  The 
history  of  price  agreements  shows  many  forms  of  under- 
standing or  bargaining  entered  into  for  the  purpose  of  put- 
ting prices  up  to  all  that  the  traffic  would  bear.  The  "Gary 
dinners"  which  maintained  tacit  understanding  among 
steel  producers  as  to  what  prices  would  be  charged;  "any 
number  of  dinner  and  luncheon  clubs  and  reunions  and 
general  understandings,  winks,  and  telephone  messages,"^ 
mutual  understandings  between  anthracite  coal  operators 
or  big  meat  packers  as  to  the  distribution  of  business  and 
price  quotations,  joint  action  among  dealers  in  building 
supplies  to  charge  contractors  exorbitant  prices  for  cement 
or  brick,  common  price  terms  among  wholesale  grocers  or 
among  druggists, — in  these  and  other  ways,  price  agree- 
ments have  been  maintained  at  different  times  and  in  dif- 
fering degrees  in  most  lines  of  economic  activity.  Agree- 
ments in  the  form  of  pools  were  at  one  time  widespread. 
Pools  involved  definite  agreements  either  to  divide  the  prod- 
uct into  quotas  for  each  producer  who  belonged  to  the  pool, 

1  Samuel  Untermyer,  "Hearings  Before  Senate  Interstate  Commerce 
Committee,"  V,  p.  214. 


Markets — Their  Principles  and  Strategy    339 

or  to  divide  the  quantity  each  producer  was  to  sell  or  the, 
territory  in  -which  he  was  to  sell,  or  to  put  all  profits  of  all 
companies  into  a  common  fund  to  be  shared  ultimately  by 
the  several  companies  on  an  agreed  pro  rata  plan,  or  any 
combination  of  these  policies.  These  agreements  of  one  sort 
and  another  have  run  a  harsh  gauntlet  of  laws  and  court 
decisions,  and  have  been  generally  condemned  in  so  far  as 
they  result  in  undue  restraint  of  trade,  or  unfair  and  un- 
reasonable prices. 

Trade  associations  have,  however,  found  it  possible  to 
render  most  important  services  without  as  a  usual  thing 
indulging  in  illegal  price  practices.  They  provide  for  an 
exchange  of  information  about  the  basic  facts  of  production 
costs,  market  conditions,  trade  statistics,  credit  ratings, 
standardization  of  qualities  and  grades,  freight  and  traffic 
matters,  labor  policies,  trade  legislation,  insurance  rates. 
Trade  associations  were  encouraged  during  the  War  as  a 
medium  by  which  government  agencies  could  direct  indus- 
try effectively^  toward  meeting  war  time  conditions.  They 
furnished  a  definite  organization  through  which  the  "War 
Administration  could  communicate  its  wishes  to  the  hun- 
dreds of  thousands  of  individual  companies  the  country 
over.  The  advantages  of  co-operation  became  so  apparent 
that  trade  associations  did  not  wane  after  the  War,  but 
grew  in  strength  and  membership.  The  cooperative  efforts 
of  trade  associations  to  supply  information  on  production 
costs  have  led  to  greater  uniformity  in  prices  in  many  cases. 
The  trade  information  is  often  kept  strictly  in  the  hands  of 
members,  with  the  result  that  although  there  may  not  be 
collusion  or  definite  agreement  on  price  policies,  there  is 
created  a  fairly  uniform  price  control.  Each  man  acts  upon 
the  same  exclusive  information  as  the  other  members  of  his 
trade  association,  and  the  uniform  price  action  resulting  has 
substantially  the  same  effect  in  many  cases  as  though  it 
were  the  outcome  of  collusion  among  traders.  The  legal 
status  of  such  trade  association  policies  is  not  yet  clearly 
determined.  It  would  appear  reasonable  and  possible  to 
retain  the  constructive  services  and  co-operative  features  of 


340    Markets — Their  Principles  and  Strategy 

trade  associations  and  to  discard  whatever  undue  monopoly 
influences  attempt  to  assert  themselves.'- 

Limits  to  Monopoly  Influence  on  Prices 

Efforts  to  maintain  monopoly  prices  are  subject  to  cer- 
tain limits  and  restrictions  of  a  very  important  nature. 
Economic  and  political  forces  combine  to  put  checks  upon 
monopoly  ambitions  after  they  have  passed  certain  limits. 

1.  Limit  in  demand.  A  monopoly  in  a  necessity  of  life 
may  at  times  drive  prices  to  extraordinary  heights  because 
people  cannot  do  without,  no  matter  what  the  price.  The 
era  of  specialized  manufacture  has  brought  into  the  market 
so  many  articles  which  were  at  one  time  luxuries  or  com- 
forts, but  have  become  by  custom  and  habit  virtual  necessi- 
ties that  monopoly  in  these  lines  can  count  upon  a  fairly 
stubborn  and  insistent  demand. 

2.  Limit  in  potential  competition.  If  a  monopoly 
pushes  the  prices  of  goods  so  high  that  profits  are  great, 
competitors  will  probably  be  drawn  into  the  field.  The  new 
competitors  will  then  engage  in  a  price  war  with  the  old 
business  combination,  and  after  a  time,  the  combination 
may  buy  out,  or  crush  the  competitor,  or  the  competitor 
may  survive,  and  continually  harass  the  original  combina- 
tion with  its  competitive  prices.  Although  potential  com- 
petition is  existent  and  may  possibly  enter  the  actual  field 
at  any  time,  nevertheless  prospective  competitors  are  likely 
to  think  twice  before  sinking  their  time  and  money  in  many 
lines  of  business,  realizing  full  well  the  ruthless  attitude  of 
many  big  companies  toward  venturesome  competitors. 
Inertia,  too,  works  against  a  ready  entrance  of  competitors 

1  See  special  reports  of  "Federal  Trade  Commission  in  1921  on 
Trade  Associations  and  Open  Price  Associations."  Also  J.  E.  Davies, 
Commissioner  of  Corporations,  1915,  "Trust  Laws  and  Unfair  Com- 
petition," Chapter  XI.  The  legal  status  of  the  open  competition  and 
open  price  policies  of  trade  associations  is  still  indistinct.  In  De- 
cember, 1921,  the  Supreme  Court  decided  the  American  Hardware 
Manufacturers'  Association  contrary  to  the  Sherman  Act,  because  by 
the  exchange  of  information  on  prices,  production  volume  and  costs, 
sales,  etc.,  the  Association  served  to  restrict  competition  and  to 
raise  prices  by  concerted  action.  This  was  a  five-to-four  decision, 
and  leaves  some  doubt  as  to  what  such  associations  may  and  may 
not  do. 


Markets — Their  Principles  and  Strategy    341 

into  lines  of  business  where  prices  and  profits  are  high. 
Hence,  although  potential  competition  serves  to  keep  mo- 
nopoly efforts  within  certain  limits,  those  limits  are  highly 
variable  and  indefinite. 

3.  Limit  in  possible  substitution.  If  the  price  of  beef 
runs  too  high,  people  can  eat  mutton  or  pork.  If  gas  rates 
are  put  too  high,  electricity  is  likely  to  come  in.  If  the 
price  of  one  form  of  article  becomes  exorbitant,  buyers  can 
pass  it  by  and  purchase  substitutes.  Monopolists  who 
experiment  with  prices  face  the  imminent  danger  of  losing 
trade  altogether  by  driving  buyers  to  use  articles  which 
will  give  practically  an  equivalent  of  satisfaction  and 
utility.^ 

4.  Limit  in  public  control.  "When  trusts  and  all  forms 
of  big  business  first  made  their  appearance,  the  country 
was  naturally  bewildered  to  know  how  to  handle  the  new 
phenomena.  While  legislatures  were  experimenting  with 
various  types  of  laws,  and  courts  were'  maturing  judicial 
viewpoints,  it  was  possible  for  monopolies  to  take  advan- 
tage of  the  situation,  and  indulge  in  practices  of  unfair 
competition,  price  discrimination,  and  price  boosting  which 
have  later  come  under  the  ban  of  the  law.  The  Sherman 
Anti-trust  Act  of  1890  has  been  interpreted  as  disap- 
proving any  conspiracy  or  monopoly  in  undue  and  un- 
reasonable restraint  of  trade.  After  the  law  had  been 
on  the  statute  books  for  twenty  years,  the  Supreme  Court 
read  into  the  act  "the  rule  of  reason,"  by  Avhich  it  inter- 
preted the  Act  to  prohibit,  not  all  restraint  of  trade,  nor  all 
monopoly,  but  only  those  interferences  with  trade  and 
prices  which  were  undue  and  unreasonable.  There  have 
been  people  who  have  continually  charged  that  virtually  all 
big  business  is  bad  business  and  dangerous  business,  and 
ought  to  be  dissolved;  and  simultaneously  there  have  been 
people  who  have  steadfastly  maintained  that  big  business 
is  the  natural  institutional  evolution  of  this  day  and  age, 
and  that  its  economies  and  advantages  can  be  retained  while 

I'Sce  J.  A.  Hobaon,  "Evolution  of  Modern  Capitalism,"  pp.  230- 
235;  J.  B.  Clark  and  J.  M.  Clark,  "The  Control  of  Trusts,"  pp.  28, 
123-127. 


342     Markets — Their  Principles  and  Strategy 

its  evils  and  dangers  can  be  regulated  out  of  existence. 
The  general  philosophy  of  both  groups  has  been  in  evidence 
in  recent  judicial  decisions  and  government  legislation. 
The  most  notable  pieces  of  concrete  legislation  by  the  Fed- 
eral Government  have  been  the  Federal  Trade  Commission 
Act  and  the  Cla}1:on  Anti-trust  Act,  both  passed  in  1914. 
The  Federal  Trade  Commission  investigates  trade  practices, 
orders  offenders  to  refrain  from  methods  of  unfair  compe- 
tition, publishes  facts  as  to  costs,  prices  and  profits  for 
various  lines  of  industry  and  trade,  enforces  the  provisions 
of  the  Clayton  Act,  keeps  informed  as  to  the  extent  to  which 
companies  carry  out  the  decrees  of  courts  under  the  Sher- 
man Act,  and  investigates  combinations  for  foreign  trade. 
Chiefly,  the  weapon  which  the  Federal  Trade  Commission 
wields  is  investigation  and  publicity  of  the  facts  of  business, 
and  co-operation  with  business  men  in  the  direction  of  com- 
pliance with  federal  law  without  expensive  litigation  in  the 
courts. 

The  Claji;on  Act  forbids  monopolistic  price  discrimina- 
tions, new  holding  company  formations,  and  interlocking 
directorates.  The  last  two  provisions  are  especially  aimed 
at  big  business  as  such,  and  rest  on  the  assumption  that  size 
itself  is  a  menace.  For  the  most  part,  outside  of  these  two 
provisions,  both  the  Clayton  Act  and  the  Federal  Trade 
Commission  Act  aim  not  to  destroy  big  business,  but  to 
make  sure  that  the  practices  and  price  policies  of  business, 
whether  large  or  small,  shall  be  fair,  and  reasonable,  and 
socially  beneficial.  They  aim  to  make  destructive  compe- 
tition impossible,  to  put  under  the  ban  of  the  law  the  modes 
of  warfare  between  business  units  of  all  sizes,  which  are 
predatory  and  vicious.  And  simultaneously  they  tend  to 
preserve  a  large  field  for  concentration  of  business,  for 
moderate  monopoly  influences  and  advantages,  for  construc- 
tive co-operation  and  for  competition  which  leads  to  the 
survival  of  the  most  efficient.  The  possibility  of  public 
control  serves  therefore  as  a  limit  to  monopoly  excesses  and 
to  unfair  price  policies.^ 

iSee  E.  Jones,  "Trust  Problem  in  the  United  States,"  Chapters 
14-15. 


Markets — Their  Principles  and  Strategy     34!3 

Natural  monopolies,  such  as  railroads,  waterpower  re- 
sources, gas  and  electric  service,  are  so  thoroughly  asso- 
ciated with  the  public  need  that  they  have  generally  come 
within  the  scope  of  a  more  rigid  form  of  public  control. 
The  Interstate  Commerce  Commission  very  closely  super- 
vises the  pecuniary  policies  of  railroads.  There  has  been 
powerful  agitation  of  late  to  declare  the  coal  industries  and 
the  meat  industries  public  utilities  and  to  subject  them  to  a 
public  control  somewhat  similar  to  that  already  exercised 
over  the  railroads.^  Public  Service  Commissions  are  com- 
mon devices  for  the  regulation  of  lighting,  heating,  and 
municipal  transportation  services,  and  assert  authority  in 
varying  degrees  over  rates  or  prices  in  the  industries  under 
their  jurisdiction.  Industrial  concentration  in  the  basic 
industries  is  already  leading  many  careful  students  to  raise 
the  question  whether  concentration  is  socially  safe  except  as 
it  is  subjected  to  a  substantial  measure  of  public  regulation 
and  control.  The  maturing  of  opinion  upon  this  issue  will 
undoubtedly  hinge  largely  upon  the  manner  in  which  con- 
centrated business  orders  its  policies,  with  regard  to  prices 
and  all  matters  tinged  with  a  public  import,  during  the 
next  few  years.  Unless  the  device  of  publicity  and  prohibi- 
tion of  unfair  competition  as  now  administered  by  the 
Federal  Trade  Commission  serves  to  maintain  a  policy  of 
price  moderation  and  to  eliminate  the  grosser  cases  of  profi- 
teering, the  next  degree  of  public  control  will  be  demanded 
by  the  public,  namely  outright  government  regulation  sim- 
ilar to  that  exercised  through  the  Interstate  Commerce 
Commission  or  the  Public  Service  Commissions. 

The  record  of  profiteering,  as  reported  by  various  govern- 
ment authorities,  especially  during  the  first  years  of  the 
War  and  during  the  months  closely  following  the  armistice, 
has  left  grave  doubts  in  the  public  mind  as  to  the  willing- 
ness of  big  business  concerns  to  moderate  their  price  and 
profit  policies  within  satisfactory  bounds.     Moreover,  the 

iThe  Packers'  Control  Bill,  passed  by  Congress  in  August,  1921, 
established  regulation  of  the  meat  packers  to  be  administered  under 
the  Secretary  of  Agriculture.  The  law  provides  for  uniform  ac- 
counting by  the  packers,  for  publicity  of  the  packers'  affairs,  and 
for  definite  powers  of  the  Federal  Trade  Commission  to  investigate 
the  industry. 


344)    Markets — Their  Principles  and  Strategy 

experience  of  the  government  with  price  fixing  during  the 
war  had  a  sufficient  degree  of  success  to  make  it  fairly  clear 
that  at  any  time  when  the  step  seems  desirable,  the  govern- 
ment can  effectively  create  the  governmental  machinery 
suited  to  price  fixing  in  times  of  peace.  The  War  demon- 
strated that  price  fixing  is  not  an  economic  impossibility. 
Once  price  fixing  has  been  proved  possible  of  achievement, 
it  is  always  ready  at  hand  as  a  device  to  be  called  into  being 
to  correct  price  abuses  which  creep  into  private  business 
combinations.  Comparisons  made  by  the  "War  Industries 
Board  indicated  that  the  average  prices  for  controlled  arti- 
cles increased  during  1917-1918  much  less  than  did  the 
prices  of  uncontrolled  articles.^  Although  the  methods  of 
price  fixing  were  not  uniform  between  all  bureaus  and  de- 
partments, nevertheless  in  the  main  they  adhered  with 
reasonable  closeness  to  the  objective  laid  down  by  President 
Wilson  on  July  12,  1917,  namely,  that  the  fixed  price  should 
be  sufficient  to  "sustain  the  industries  concerned  in  a  high 
state  of  efficiency,  provide  a  living  for  those  who  conduct 
them,  enable  them  to  pay  good  wages  and  make  possible 
expansions  of  their  enterprises."  Price  fixing  in  time  of 
peace  would  be  handicapped  by  lacking  the  equivalent  of 
the  high  spirit  of  patriotic  co-operation  from  business  men 
which  prevailed  during  the  war  emergency,  and  hence  is  not 
likely  to  be  resorted  to  during  peace  times  except  as  the 
need  is  urgent.  The  possibility  of  price  fixing  hangs  as  a 
kind  of  tacit  ultimatum  to  monopolists  who  might  like  to 
boost  prices  unduly,  and  hence  serves  as  an  important  limit 
to  monopoly  price  policies.^ 

Relation  Between  Price  Policies  and  Supply  and  Demand 

It  is  obvious  at  this  stage  of  the  analysis  that  supply  and 
demand  allow  considerable  leeway  for  human  ingenuity  and 
strategy.    Over  broad  periods  of  time,  and  in  the  long  run, 

1  "War  Industries  Board,  Fluctuations  of  Controlled  and  Uncon- 
trolled Prices,"  p.  8. 

2  See  "Carnegie  Studies:  Prices  and  Price  Control  During  the 
World  War,"  and  American  Economic  Review  Sup.,  March,  1919, 
pp.  233-276;  F.  W.  Taussig,  Quarterly  Journal  of  Economics,  Feb., 
1919,  p.  238. 


Markets — Their  Principles  and  Strategy     345 

supply  and  demand  operate  as  general  tendencies  and 
fundamental  forces.  But  they  are  not  hard  and  fast,  nor 
absolutely  binding  laws  which  determine  prices  to  a  nicety. 
Within  the  limits  of  their  fundamental  tendencies  there  lies 
ample  room  for  policies  of  manipulation  and  control.  De- 
mand can  be  expanded  or  contracted  by  deliberate  action 
on  the  part  of  business  men  and  supply  can  be  curtailed, 
hoarded,  or  multiplied  as  business  judgment  dictates.  Price 
policies  at,  or  above,  or  below  the  market  level,  can  be  ap- 
plied in  ways  which  alter  both  supply  and  demand.  From 
practical  observation  of  business  practices  the  country  over, 
the  Comptroller  of  the  Currency,  D.  R.  Crissinger,  declared 
in  April,  1921:  "Manufacturers,  jobbers,  wholesalers,  re- 
tailers, laborers — are  all  in  some  sort  of  combination  to 
frustrate  this  fundamental  law  of  economics  {i.e.,  supply 
and  demand).  Each  is  out  to  "get  his"  first.  .  .  .  These 
combinations — gentlemen's  agreements,  or  what  not — have 
gotten  prices  of  things  to  the  point  where  there  is  no  rela- 
tion between  cost  of  raw  materials  and  cost  of  production ; 
no  relation  between  cost  of  production  and  cost  to  the  con- 
sumer; in  short,  where  there  is  no  relation  between  value 
and  selling  price. ' '  Due  allowance  must  of  course  be  made 
for  the  sweeping  character  of  so  emphatic  a  declaration. 
A  conservative  judgment  on  the  same  general  subject  may 
well  be  quoted,  from  the  pen  of  a  highly  respected  Ameri- 
can economist,  F.  "VV.  Taussig:  "The  response  of  demand 
to  new  conditions  of  supply  and  price  is  very  uncertain. 
The  penumbra  is  wide.  Within  it  there  is  much  room  for 
fluctuation  of  opinions  and  therefore  of  price,  for  the  influ- 
ence of  an  aggressive  operator  or  a  commanding  firm  and 
for  indeterminate  phenomena.  .  .  .  There  is  no  telling 
what  immediate  response  there  will  be  to  an  offer  of  larger 
supply  or  to  a  decline  in  the  day's  or  week's  quotation.  A 
heavy  sale  by  a  big  operator  and  a  lower  price  accepted  by 
him  may  easily  mean  not  that  more  will  be  bought  by 
others,  but  that  buyers  will  be  scared  off  and  that  price 
will  fall  still  further. 

"The  market  may  react  in  all  sorts  of  ways  to  changes 
in  offers  and  bids  and  going  prieies.    The  outcome  depends 


346     Markets — Their  Principles  and  Strategy 

on  men's  hopes  and  fears  and  guesses,  and  momentary 
states  of  mind.  The  nervy  man  may  make  money  by  coolly 
watching  his  more  sensitive  fellows  and  playing  on  their 
frailties, 

"Often  lower  price  does  not  lead  to  an  increase  in  the 
quantity  that  can  be  disposed  of  in  a  market.  Neither  does 
it  necessarily  lessen  the  quantity  that  will  be  offered  there. 
On  the  contrarj^  it  will  repeatedly  happen  that  as  price 
falls,  less  is  demanded,  not  more ;  and  that  not  less  is  offered 
for  sale,  but  actually  more.  A  decline  in  price,  so  far  from 
tending  always  to  bring  its  own  remedy  through  tempting 
people  to  buy  more,  sometimes  intensifies  itself  through 
inducing  people  to  sell  still  more."  A  further  indication 
of  the  flexibility  which  the  general  market  principles  must 
contain  is  seen  in  the  following  words  by  H.  C.  Emery, 
made  as  a  result  of  extended  investigations  by  the  United 
States  Tariff  Commission:  "The  price  paid  by  the  con- 
sumer and  the  price  received  by  the  producer  seem  to  have 
very  little  direct  relation. ' '  ^ 

The  Science  of  Spending  Money 

Economics  has  often  been  defined  as  the  science  which 
deals  with  the  wealth-getting  and  wealth-using  activities  of 
human  beings,  but  the  emphasis  of  economic  analysis  has 
been  overwhelmingly  on  the  wealth-getting  activities,  and 
very  slightly  on  the  wealth-using  activities.  The  War  at- 
tracted the  attention  of  students  to  the  problem  of  wealth 
using,  especially  by  its  urgent  requirements  for  thrift  and 
saving,  for  elimination  of  waste  and  extravagance,  for  dis- 
tinguishing between  essential  and  non-essential  wants,  for 
patriotic  guidance  in  numberless  ways  of  consumers' 
choices.  It  was  made  unmistakably  clear  that  in  time  of 
war  consumers'  choices  were  not  their  individual  busi- 
ness merely,  but  were  vitally  the  business  of  the  nation. 
National  efficiency  depended  upon  wise  consumption;  and 
at  great  cost  the  government  set  out  to  educate  people  on 
matters  of  good  consumption  and  bad  consumption  from 
the  standpoint  of  helping  to  win  the  war.     Hence  the  war 

^Quarterly  Journal  of  Economics,  May,  1921,  pp.  396-410. 


Markets — Their  Principles  and  Strategy     347 

necessities  broke  the  time-worn  tradition  of  economics  tliat 
what  a  person  wants  to  spend  his  money  for  is  his  own 
affair,  and  established  the  principle  that  it  is  the  nation's 
affair.  Unwise  spending  during  war  time  would  rapidly 
weaken  the  military  efficiency  of  the  nation.  Indeed,  to 
some  who  have  considered  the  problem  in  its  broadest 
aspects,  it  appears  that  unwise  spending  has  definite  cause 
and  effect  connections  with  national  progress  or  decay.  This 
is  the  view  of  T.  N.  Carver:  "The  importance  of  the  con- 
sumption of  wealth  is  further  emphasized  by  the  considera- 
tion that  as  many  and  as  dire  calamities  have  overtaken 
nations  and  peoples  because  of  their  irrational  habits  of 
consumption  as  because  of  inefficient  systems  of  production, 
exchange  or  distribution.  ...  A  few  are  already  begin- 
ning to  discover  that  consumption  is  more  important  than 
production,  exchange  or  distribution, — possibly  more  im- 
portant than  all  three  combined."^ 

The  ultimate  destination  of  economic  activity  is  the 
spending  of  income  for  purposes  which  satisfy  the  spender. 
Goods  are  produced  as  a  means  toward  the  end  of  consump- 
tion, and  the  test  of  the  worthwhileness  of  any  kind  of  pro- 
duction is  to  a  large  extent  the  effect  which  the  consumption 
of  the  goods  must  have  upon  individual  health,  character, 
and  personality,  and  upon  national  strength,  efficiency  and 
prosperity.  The  economic  foundations  of  a  country  are 
laid  in  the  ways  in  which  consumers  decide  to  spend  their 
income.  "We  need  to  turn  consumption,"  remarks  Alfred 
Marshall,  "into  paths  that  strengthen  the  consumer  and 
call  forth  the  best  qualities  of  those  who  provide  for  con- 
sumption." Economics  can  scarcely  dare,  in  the  face  of 
such  a  challenge,  to  take  the  position  that  if  individuals 
choose  to  spend  their  earnings  foolishly,  wastefully,  or 
viciously,  the  effects  are  their  own  lookout  and  concern  no 
one  but  themselves.  Economics  is  obliged  to  address  its 
study,  therefore,  to  such  questions  as :  What  are  the  causes 
for  the  various  types  of  demand?  Why  do  wants  change? 
What  are  the  effects  of  different  ways  of  spending  income? 
Why  are  the  urgent  wants  of  some  denied  the  means  of 

1  "Principles  of  Political  Economy,"  pp.   11,  455. 


348    Markets — Their  Principles  and  Strategy 

satisfaction  while  the  trivial  wants  of  others  are  satisfied 
in  full  ?  What  are  the  forces  which  shape  the  standards  of 
consumption?^ 

Probably  the  most  useful  viewpoint  from  which  to  study 
consumer's  wants  is  the  psychological  viewpoint.  Demand 
in  its  multitudinous  shapes  and  forms  is  fundamentally 
a  psychological  fact.  "Wants,  choices,  satisfactions,  grat- 
ifications, desires  all  spring  from  human  nature,  and  all 
are  matters  of  individual  and  social  psychology.^ 

Each  consumer  differs  in  his  human  equipment  from  all 
other  consumers.  His  original  instinctive  mechanism  is  dis- 
tinct, his  experiences  in  developing  his  original  nature  are 
unique,  and  in  his  beliefs,  wishes,  convictions  and  whims, 
there  is  no  one  else  quite  like  him.  He  has  eccentricities, 
peculiarities,  and  idiosyncracies.  He  has  an  element  of 
originality  and  individuality  in  his  likes  and  dislikes.  His 
preferences  bear  the  stamp  of  his  personality.  He  has  an 
individual  psychology. 

However,  the  surprising  feature  of  the  consumer's  psy- 
chology is  the  extent  to  which  it  owes  its  origin  and  direc- 
tion to  his  social  relations.  The  gradual  building  of  the 
individual's  wants  and  beliefs  by  the  processes  of  social 
psychology  is  the  paramount  characteristic  of  consumers' 
demand.  This  process  in  its  broadest  aspects  is  splendidly 
stated  by  John  Dewey  as  follows :  "Mother  and  nurse,  father 
and  older  children,  determine  what  experiences  the  child 
shall  have;  they  constantly  instruct  him  as  to  the  meaning 
of  what  he  does  and  undergoes.  The  conceptions  that  are 
socially  current  and  important  become  the  child's  principles 
of  interpretation  and  estimation  long  before  he  attains  to 
personal  and  deliberate  control  of  conduct.  Things  come 
to  him  clothed  in  language,  not  in  physical  nakedness,  and 
this  garb  of  communication  makes  him  a  sharer  in  the 
beliefs  of  those  about  him.  These  beliefs  coming  to  him  as 
so  many  facts  form  his  mind ;  they  furnish  the  centers  about 

1  See  J.  M.  Clark,  "Economics  and  Modern  Psycholoery,"  Journal 
of  Political  Economy.  Volume  26,  pp.  1,  136;  C.  H.  Cooley,  "Social 
Process,"  p.  298;  J.  Dewey,  "Creative  Intelligence,"  pp.  312-313,  350- 
352. 

2B.  M.  Anderson,  Jr.,  "Value  of  Money,"  p.  570. 


Markets — Their  Principles  and  Strategy    349 

which  his  own  personal  experiences  and  perceptions  are 
ordered."^  The  consumer  does  not  form  his  individual 
canons  of  taste  and  style  with  a  free  and  independent  mind, 
nor  by  his  purely  original  and  detached  judgment.  The 
social  heritage  of  tastes,  styles,  wants  and  demands  form 
his  mind,  and  unless  the  individual  over-asserts  his  individ- 
uality to  the  extent  of  becoming  a  freak  or  fanatic,  he  thinks 
and  plans  and  acts  in  spending  his  income  in  fairly  close 
conformity  with  the  established  standards  of  his  day  and 
age.  This  social  heritage  of  standards  and  canons  is  care- 
fully analyzed  by  William  Graham  Sumner  in  his  profound 
study  of  the  folkways  and  the  mores  of  society.  The 
mores  are  defined  as  "the  ways  of  doing  things  which  are 
current  in  a  society  to  satisfy  human  needs  and  desires, 
together  with  the  faiths,  notions,  codes,  and  standards  of 
well  living  which  inhere  in  those  ways."  And  Sumner 
strongly  asserts :  * '  The  most  important  fact  about  the  mores 
is  their  dominion  over  the  individual.  Arising,  he  knows 
not  whence  or  how,  they  meet  his  opening  mind  in  earliest 
childhood,  give  him  his  outfit  of  ideas,  faiths,  and  tastes, 
and  lead  him  into  prescribed  mental  processes.  They  bring 
to  him  codes  of  action,  standards,  and  rules  of  ethics.  They 
have  a  model  of  the  man-as-he-should-be  to  which  they  mold 
him,  in  spite  of  himself  and  without  his  knowledge. ' '  ^ 

It  is  very  easy  to  exaggerate  the  element  of  social  psy- 
chology and  to  underrate  the  element  of  individual  psychol- 
ogy in  the  shaping  of  consumers'  tastes.  As  a  safeguard 
against  inferring  an  untrue  balance  between  the  two,  it  is 
important  to  give  careful  consideration  to  the  following 
statement  by  C.  H.  Cooley:  "The  ordinary  man  is  a  con- 
former;  he  lives  in  the  institution  and  accepts  its  estab- 
lished valuations,  though  not  without  impressing  some 
degree  of  individuality  upon  them.  In  this  way  we  get 
our  ideas  and  practices  regarding  religion,  marriage,  dress 
and  so  on.  So  in  pecuniary  matters  one  accepts  in  a  gen- 
eral way  the  current  values,  but  has  a  certain  individuality 
in  his  choices  which  makes  him  to  some  extent  a  special 


1  "Reconstruction  of  Philosophj'',' 

2  "Folkways,"  pp.  59,  173-174. 


p.  93. 


350    Markets — Their  Principles  and  Strategy 

factor  in  the  market.  There  is  no  absolute  conformity;  we 
do  everything  a  little  differently  from  anyone  else ;  but  this 
does  not  prevent  our  being  controlled,  in  a  broad  way,  by 
the  prevailing  institutions.  This  is  what  the  usual  economic 
analysis  ignores,  or  perhaps  omits  as  beyond  its  proper 
range. 

"Along  with  this  we  have  the  phenomenon  of  non-con- 
formity. Individuals  of  special  natural  endowment,  or 
unusual  situation,  or  both,  depart  widely  from  the  type, 
and  initiate  new  tendencies.  .  .  .  "^ 

These  cardinal  principles  of  modern  social  psychology 
reveal  the  fallacy  of  considering  the  average  consumer 
primarily  as  an  independent  individual,  actuated  by  one 
motive  only, — the  money  motive.  Economics  has  too  often 
over-simplified  the  consumer's  psychology.  Consumer's 
demand  is  fashioned  by  a  host  of  influences  other  than  the 
highness  or  lowness  of  price.  It  is  not  enough,  in  explain- 
ing demand,  to  state  that  if  price  is  increased,  demand  will 
diminish,  and  if  price  is  decreased,  demand  will  enlarge.  A 
varying  price  scale,  it  is  true,  does  have  its  effects  on 
demand,  but  demand  is  a  creature  of  all  the  forces  and 
influences  which  bear  upon  social  and  individual  psychol- 
ogy. The  whole  instinctive  nature  of  man  figures  in  his 
wants  and  demands,  and  the  reasons  for  spending  his  money 
as  he  does  are  as  broad  as  human  nature.  Consumers' 
motives  are  not  dollar  motives  alone,  but  all  the  motives  of 
life.  The  science  of  spending  money  is  then  the  science  of 
the  motives  which  direct  the  spending  of  money,  and  inas- 
much as  virtually  all  activities  and  enjoyments  in  modern 
society  require  the  payment  of  a  money  price,  the  science 
of  spending  money  becomes  in  the  deepest  sense  an  economic 
study  of  the  values  and  standards  of  the  civilization  of 
a  certain  day  and  age. 

The  motives  of  consumers  in  spending  their  income  are 
directed  and  organized  by  the  institutions  in  which  con- 
sumers live  and  work,  and  institutions  are  historical  prod- 
ucts. Marketing  institutions  have  developed  from  rude 
beginnings  into  the  complicated  affairs  of  to-day,  and  vary 

1  "Social  Process,"  p.  300. 


Markets — Their  Principles  and  Strategy    351 

from  country  to  country  in  important  ways  because  of  the 
varying  historical  backgrounds  of  modern  countries.  Un- 
thinkingly we  absorb  the  spirit  and  ideas  and  customs  of 
our  own  generation,  as  these  are  filtered  into  our  characters 
through  the  several  stages  of  life  by  our  contact  with 
institutions,  religious,  educational,  family,  political,  artistic, 
pecuniary,  or  otherwise.  No  matter  what  past  stage  in 
the  development  of  any  of  these  institutions  we  might  pick 
out  for  observation,  we  would  find,  along  with  its  admirable 
characteristics,  a  countless  horde  of  institutional  standards 
and  values  which  now  seem  ridiculous,  wasteful,  humorous, 
evil,  or  absurd.  At  some  time  past,  however,  these  insti- 
tutional values  and  canons  of  taste  set  the  mold  for  social 
motives  in  spending  money,  and  directed  the  channels  of 
disbursement  for  the  people  who  were  born  and  brought 
up  under  those  institutional  conditions.  This  institutional 
influence  on  the  social  psychology  of  spending  money  is 
recognized  by  A.  T.  Hadley  in  the  assertion  that  "With 
most  men  custom  regulates  their  economic  action  more 
potently  than  any  calculation  of  utility  which  they  are 
able  to  make."  And  he  adds,  ''It  is  not  merely  that  people 
want  things  which  hurt  them  or  which  fail  to  do  them  the 
maximum  good  .  .  .  but  that  they  buy  things  without 
knowing  whether  they  want  them  or  not." 

Now,  a  very  large  part  of  the  customs  and  traditions 
built  up  through  the  processes  of  history  are  serviceable, 
efficient,  and  sound ;  but  not  all  of  them.  Institutions  are 
replete  with  influences  of  decay,  dissipation  and  destruction. 
And  the  social  psychology  which  is  interwoven  with  social 
institutions  is  replete  with  wants  and  desires  which,  if  grat- 
ified, lead  to  mental,  moral  and  physical  weakness.  In 
marketing  institutions,  the  exercise  of  critical  judgment, 
of  shrewd  reasoning,  of  mental  strategy  takes  place  prin- 
cipally on  the  part  of  sellers,  and  to  a  much  less  degree, 
on  the  part  of  buyers.  The  managers  of  distribution,  the 
wholesalers  and  retailers  and  speculators,  usually  devote  a 
high  degree  of  intelligence  to  the  art  of  selling  goods  at  a 
profit ;  but  the  buyers,  the  consumers  of  the  goods,  are  more 
distinctly  the  victims  of  the  customs,  habits,  and  traditions 


352     Markets — Their  Principles  and  Strategy 

whicli  have  surrounded  them  from  youth  up.  Consequently, 
the  spending  of  money  is  a  department  of  economic  interest 
which  is  peculiarly  subject  to  instinctive  nature,  and 
which  is  influenced  greatly  by  the  unconscious  social  forces 
coming  from  institutions.  For  these  reasons,  the  spend- 
ing of  money  has  been  referred  to  as  one  of  "the  backward 
arts."  Money  is  spent  for  objects  as  a  matter  of  course, 
because  fashion,  reputability,  prestige,  or  the  moral  code 
calls  for  that  sort  of  expenditure,  and  consumers  are  as  a 
rule  reluctant  to  submit  many  of  their  items  of  disburse- 
ment to  critical  judgment,  or  to  decide  freely  and  inde- 
pendently whether  the  fashion,  the  code,  the  canon  of 
taste  and  the  standard  of  reputability  are  good  or  bad. 

These  abstract  generalizations  will  be  made  clearer  if 
some  concrete  illustrations  are  presented.  When  slavery 
was  the  established  institution,  supported  by  churrh  and 
state,  consumers,  as  a  matter  of  course,  spent  part  of  their 
income  in  the  purchase  of  slaves  to  perform  household 
service.  At  the  time,  the  social  mind  of  slave  owners 
considered  the  spending  of  income  on  slave  servants  the 
right  and  respectable  thing  to  do.  Later  judgment  has 
decreed  that  spending  money  for  such  a  purpose  was  sub- 
versive of  the  nation's  vitality  and  character.  Again,  a 
short  time  ago,  it  was  the  right  of  any  man  or  woman  to 
spend  as  much  of  his  or  her  income  as  might  be  desired 
in  the  consumption  of  alcoholic  beverages,  and  the  indi- 
vidual consumer  might  consume  alcohol  in  any  form  which 
he  pleased,  and  as  much  of  it  as  he  pleased.  As  a  result 
of  much  agitation,  propaganda,  and  education,  the  pre- 
ponderant opinion  of  the  nation  declared  for  a  prohibition 
of  that  form  of  spending  income,  and  by  a  constitutional 
amendment,  made  it  illegal  to  traffic  in  that  kind  of  goods, 
on  the  ground  that  the  consumption  of  alcohol  was  bad  for 
the  nation's  morals,  was  harmful  to  the  health  of  the  people, 
and  was  a  social  menace.  By  this  change  of  institutional 
arrangement,  consumers  have  been  forced  to  divert  some- 
thing like  $2,000,000,000  of  purchasing  power  into  new 
channels.  To  take  another  illustration,  those  responsible 
for  the   Americanization   movement  in  this   country  are 


Markets — Their  Principles  and  Strategy    353 

anxious  to  educate  foreigners  in  our  midst  to  spend  their 
money  in  maintaining  an  American  standard  of  living. 
Americans  learn,  therefore,  with  a  feeling  of  alarm  that 
one-half  of  all  immigrants  who  come  to  this  country  later 
return  to  their  home  countries,  and  take  with  them  on  an 
average  $2000  of  spending  power.  Immigrants  cannot  bo 
Americanized  if  they  will  not  spend  their  money  for  educa- 
tion for  themselves  and  their  children,  if  they  will  not  spend 
their  money  for  the  American  standard  of  food,  or  clothing, 
or  sanitation,  or  housing.  Americanization  has  as  one  of 
its  objects  the  inculcation  of  American  spending  habits 
into  foreigners.  It  is  a  matter  of  concern  that  immi- 
grants refuse  to  spend  for  things  which  Americans  con- 
sider essentials  of  life,  and  that  they  insist  to  so  large  a 
degree,  upon  saving  their  spending  power  for  the  days  of 
return  to  their  home  country.  Yet  the  social  psychology 
of  immigrants  is  intimately  wrapped  up  with  our  economic, 
religious,  political  and  educational  treatment  of  them,  and 
their  spending  standards  are  a  direct  outgrowth  of  the 
traditions  and  the  institutions  of  their  home  countries. 

A  notable  institutional  transformation  of  the  last  decade 
has  been  the  widespread  adoption  of  the  eight  hour  day. 
This  transformation  involved  the  addition  of  from  two  to 
four  hours  of  leisure  time  in  the  daily  life  of  the  working 
man.  This  has  created  a  grave  problem  in  consumption. 
The  new  leisure  period,  used  wisely,  is  capable  of  develop- 
ing a  healthier,  better  educated,  more  versatile,  more  artis- 
tic citizenship.  But  it  gives  at  the  same  time  an  oppor- 
tunity for  the  expenditure  of  income  in  riotous  living,  in 
showy  extravagance,  in  vicious  pleasures,  and  in  unedifying 
idleness.  Some  pioneer  business  concerns  have  undertaken 
various  expedients  for  guiding  the  leisure  enjoyments  of 
their  employees  along  wholesome  channels.  Night  schools, 
library  facilities,  community  enterprises,  athletic  programs, 
moving  pictures,  are  a  few  of  the  devices  devoted  to  the 
guidance  of  spending  power  during  leisure  time  into  con- 
structive channels.  By  a  vicious  use  of  leisure  time,  the 
economic  efficiency  of  the  worker  is  undermined  and  it  is 
of  real  concern  to  employers  and  tb  society  at  large  that 


354     Markets — Their  Principles  and  Strategy 

consumption  during  leisure  time  shall  result  in  betterment, 
not  degradation.  A  great  many  employers  have  found 
that  the  temptations  to  their  workers  to  spend  money  for 
luncheons  of  pie  and  candy  and  unsubstantial  foods  are  too 
great,  and  accordingly  have  installed  company  restaurants 
to  provide  wholesome  food  at  reasonable  prices.  These 
illustrations  are  only  suggestive  of  a  general  conviction 
among  employers  that  it  is  not  the  consumer's  own  bus- 
iness alone,  whether  he  shall  spend  his  income  wisely  or 
foolishly.  Workers  need  to  be  educated  and  inspired  if 
they  are  to  devote  the  proper  amount  of  spending  power 
to  insurance,  to  the  savings  bank  fund,  to  investment  in 
stocks  or  bonds.  Consumption  is  not  a  place  for  unrestricted 
individualism,  and  although  the  traditions  of  laissez  faire 
have  been  stronger  in  consumption  than  in  any  other  branch 
of  economic  interest,  even  there  they  are  crumbling.  "When, 
during  a  period  of  high  prosperity,  a  craze  develops  for 
spending  money,  much  of  it  borrowed  money,  for  high 
priced  automobiles,  it  becomes  the  duty  of  the  credit  insti- 
tutions of  the  country  to  curtail  borrowed  spending  power 
for  such  a  purpose.  The  right  to  spend  one's  income  as 
one  pleases  is  no  longer  an  unlimited  right,  but  is  amenable 
to  institutional  control  and  guidance. 

Some  questions  of  spending  income  have  come  to  hold  an 
international  importance.  Notable  in  this  connection  is 
the  cost  of  naval  and  "military  armament.  It  is  everybody's 
business  how  much  each  nation  spends  for  armament,  yet 
no  one  nation  dares  to  stop  the  consumption  of  battleships 
and  munitions  unless  all  stop.  The  American  people  have 
been  shocked  to  learn  at  the  end  of  the  World  War  that 
about  ninety  per  cent,  of  their  enormous  national  tax 
burden  goes  to  the  payment  of  war  obligations.  Yet  as 
a  nation,  they  cannot  safely  refrain  from  armament  con- 
sumption, except  as  there  is  a  change  in  international  polit- 
ical institutions.  Expenditure  of  income  is  guided  by  insti- 
tutional arrangements. 

Pecuniary  expenditure  needs  also  to  be  studied  against 
the  background  of  national  history.  Whether  a  people 
shall,  in  their  food  consumption,  be  heavy  eaters  of  meat. 


Markets — Their  Principles  and  Strategy    355 

or  of  rice,  or  of  the  grains;  whether  the  preferred  bread 
shall  be  of  wheat,  corn  or  rye;  whether  patented  forms  of 
breakfast  cereals  shall  be  in  vogue ;  whether  the  prevailing 
national  drink  shall  be  tea,  coffee,  or  beer;  these  and  many 
similar  questions  vary  immensely  from  country  to  country, 
and  from  generation  to  generation,  and  the  variations  are 
beset  with  countless  customs,  traditions  and  folkways.  No 
one  could  hope  to  comprehend  the  standards  of  fashion 
among  American  women  without  tracing  the  traditional 
American  esteem  for  Parisian  styles.  The  models  of  Amer- 
ican furniture,  and  the  art  of  spending  money  for  the 
proper  styles  of  furniture,  cannot  be  understood  apart  from 
the  periods  of  English  history,  Queen  Anne,  Queen  Mary, 
etc.  The  extent  to  which  inadequate  expenditure  for  school 
facilities  forces  children  to  attend  on  part-time  programs, 
and  the  degree  to  which  a  country  begrudges  its  scientists 
and  educators  an  adequate  income,  is  plainly  a  matter  of 
social  psychology  and  of  institutional  development.  The 
economic  waste  of  spending  huge  sums  to  maintain  in  each 
community  an  excessive  number  of  overlapping  denomina- 
tional churches,  and  of  maintaining  so  many  idle  buildings 
for  so  large  a  part  of  each  w^eek,  cannot  be  understood 
apart  from  the  denominational  history  of  churches  and 
the  psychology  of  religious  beliefs,  for  these  forbid  the 
immense  economies  possible  through  proper  church  fed- 
eration. The  difficulties  of  the  Interehurch  World  Move- 
ment, one  of  the  greatest  efforts  in  modern  times  to  guide 
the  spending  power  of  the  nation  into  humanitarian  chan- 
nels, are  in  no  small  measure  traceable  to  the  tenacious 
denominationalism  of  churches.  All  of  these  matters  pre- 
sent problems  in  the  "wealth-using  activities"  of  men; 
all  are  problems  in  the  art  of  spending  incomes;  all  lead 
back  to  social  psychology  and  social  history. 

The  primary  social  unit  for  spending  money  is  the  family, 
and  the  spending  of  the  bulk  of  the  family  income,  i.e.,  for 
family  food  and  clothing,  is  undertaken  by  the  housewife. 
It  has  been  estimated  that  about  75  per  cent,  of  the  house- 
hold purchases  arc  made  by  women.  The  spending  of  the 
family  income  involves  the  selection  of  the  most  wholesome 


356    Markets — Their  Principles  and  Strategy 

and  health-giving  foods  for  children  and  for  adults;  the 
choice  of  shoes,  hats,  and  clothing  with  a  proper  regard  to 
the  most  wear  for  the  money  spent  and  to  the  proper  styles 
and  fashions;  the  decision  between  varieties  of  knick-knacks, 
of  playthings,  of  patent  medicines,  of  care  of  children,  of 
mechanical  appliances  for  the  home,  of  endless  goods  and 
services.  About  each  of  these  fields  for  decision  in  spend- 
ing the  family  income,  there  exists  a  heritage  of  rule-of- 
thumb  notions  handed  down  by  grandparents  as  to  what 
cuts  of  meat  a  person  ought  to  buy,  and  the  kinds  of  work 
the  housewife  ought  never  to  hire  done.  There  is  con- 
stantly buzzing  in  the  housewife's  ears  the  catch  phrases  of 
clever  advertisers  who  are  anxious  to  lead  the  family  in- 
come toward  the  purchase  of  soap  because  *'It  Floats,"  or 
of  pickles  or  beans  because  there  are  "57  Varieties,"  or 
of  patent  medicine  because  of  its  color.  To  go  near  a 
modern  store  is  to  be  led  into  a  series  of  temptations  to 
buy  this,  that  and  the  other  thing,  and  to  be  forgetful 
at  the  moment  that  a  little  later,  looking  backward,  the 
buyer  is  likely  to  feel  remorseful  for  yielding  to  the  temp- 
tations. 

The  whole  buying  process  is  likely  to  be  still  further  con- 
fused by  virtue  of  the  fact  that  the  spender  of  the  family 
income  has  no  family  budget  by  which  to  apportion  scien- 
tifically the  items  of  expenditure.  The  disbursement  is 
therefore  in  danger  of  rivalling  in  recklessness  the  expen- 
diture of  a  political  legislature,  with  appropriation  often 
added  to  appropriation  by  guesswork,  haphazard,  moodi- 
ness, personal  eccentricity,  community  fad,  and  emergency 
desire.  Unlike  the  business  man,  the  woman,  who  is  the 
business  manager  of  the  family  establishment,  is  not  accus- 
tomed to  the  methods  of  cost  accounting,  which  are  indis- 
pensable to  the  intelligent  direction  of  any  modern  business, 
large  or  small.  The  average  woman,  therefore,  has  to  learn 
the  art  of  spending  the  family  income  by  the  expensive 
method  of  trial  and  error.  Probably  upwards  of  $30,- 
000,000,000  of  family  expenditure  is  thus  carried  on  an- 
nually by  the  method  of  "fumbling  through."  All  of  this 
state  of  affairs  is  not  due  to  any  incompetency  on  the  part 


Markets — Tlieir  Principles  and  Strategy    357 

of  the  family  business  managers,  but  rather  is  due  to  the 
traditions,  customs,  and  modes  of  living  which  appear  in 
the  present  day  family  institution.  Any  marked  recon- 
struction in  the  family  economy  must  necessarily  wait  upon 
the  evolutionary  changes  in  the  household  folkways.  The 
efforts  at  such  a  reconstruction  are  just  now  in  that  stage 
where  women's  curiosity  is  aroused  over  such  sciences  as 
dietetics,  hygiene,  child  psychology,  household  economy, 
and  domestic  science;  but  as  yet  a  hearty  acceptance  of 
these  sciences  which  throw  light  on  higher  standards  of 
family  consumption  is  checked  by  an  intuitive  feeling  that 
such  studies  are  merely  the  hobbies  of  impractical  theorists. 
A  forward-looking  appreciation  of  the  situation  is  made 
in  a  most  sympathetic  spirit  by  C.  H.  Cooley  in  these 
words:  "It  is  plain  also  that  in  any  plan  of  reform  of 
values  through  demand,  the  mind  of  women  must  have  a 
great  part.  In  so  far  as  this  mind  seems  at  present  to  fluc- 
tuate between  conventionalism  and  anarchy,  the  cause, 
perhaps,  is  that  it  lacks  the  guidance  and  discipline  that 
might  come  from  the  better  organization  of  women  as  a 
social  group.  .  .  .  The  critical  question  here  is,  will 
women,  under  conditions  of  freedom,  develop  a  group  con- 
sciousness of  their  own,  with  high  ideals  of  each  function, 
and  power  to  discipline  the  less  responsible  of  their  sex  ?  It 
is  hard  to  see  how  modern  civilization  can  dispense  with 
something  of  this  kind."  The  gradual  development  in 
neighborhood  psychology  of  certain  standards  of  household 
economy,  and  the  institutional  development  of  nev/  methods 
of  spending  efficiently,  do  not  seem  at  all  impracticable,  and 
it  is  not  unlikely  that  a  gradual  evolution  of  a  kind  of  pro- 
fessional pride  in  the  management  of  family  income  will 
be  realized.  An  indication  of  the  profound  economic  and 
social  significance  of  such  a  development  is  clear  in  the 
following  words  of  Royal  Meeker,  whose  direction  of  the 
cost  of  living  studies  among  thousands  of  families  for  the 
United  States  Department  of  Labor  has  given  him  an  un- 
usual knowledge  of  the  facts:  "The  workers  of  America 
are  obliged  to  live  on  a  diet  too  restricted  and  monotonous 
for  the  maintenance  of  as  high  a  degree  of  efficiency  and 


358     Mai'kets — Their  Principles  and  Sti'ategy 

health  as  ought  to  be  maintained  as  a  reasonable  minimum. 
I  am  of  the  opinion  that  the  most  efficacious  remedy  is  not 
higher  wages,  but  rather  improved  systems  for  distributing 
and  marketing  foodstuffs,  and  the  education  of  house- 
keepers in  the  art  of  keeping  house,  with  emphasis  on  diets. 
Housekeeping  is  not  exactly  a  lost  art.  It  is  one  of  the 
arts  that  has  not  yet  been  completely  found.  "^ 

The  economics  of  consumption  leads  also  to  an  analysis  of 
the  stratification  of  society  into  classes.  Every  one  is  aware 
of  the  existence  of  certain  clearly  defined  levels  of  income 
and  spending  power  in  modern  society,  and  these  have  been 
statistically  outlined  in  the  chapter  on  Ownership.  The 
sharpest  contrast  between  classes  is  obvious  when  the  ex- 
tremely rich  and  the  extremely  poor  are  put  side  by  side. 
In  between  these  extremes  are  all  gradations, — unskilled 
workers,  skilled  workers,  teachers,  lawyers,  doctors,  engi- 
neers, executives,  financiers,  and  a  fairly  wealthy  leisure 
class.  ''Our  standard  of  decency  in  expenditure  ...  is 
set  by  the  usage  of  those  next  above  us  in  reputability ; 
"until,  in  this  way,  especially  in  any  community  where  class 
distinctions  are  somewhat  vague,  all  canons  of  reputability 
and  decency,  and  all  standards  of  consumption  are  traced 
back  by  insensible  gradations  to  the  usages  and  habits  of 
thought  of  the  highest  social  and  pecuniary  class — the 
wealthy  leisure  class."  ^  The  classes  with  the  lesser  incomes 
make  up  the  mass  of  the  population,  but  their  standards  of 
taste,  style,  and  pleasure  are  derived,  directly  or  indirectly, 
from  the  classes  with  the  greater  incomes.  The  population 
at  the  base  of  the  pyramid  draws  its  customs  and  ideals  of 
spending  money  from  the  group  at  the  apex  of  the  pyramid. 
Hence,  the  people  of  large  incomes  as  a  class  exercise  an 
influence  upon  styles  and  standards  of  living  altogether  out 
of  proportion  to  their  numerical  importance.  They  are  the 
models  among  consumers,  envied  by  the  other  social  classes, 
and  to  as  large  an  extent  as  possible,  imitated  by  other 
social  classes.     What  they  buy,  everybody  wants  to  buy; 

1  "What  is  the  American  Standard  of  Living?"  Monthly  Labor  Re- 
view. Vol.  IX,  p.  5.  See,  also,  on  this  whole  problem,  "The  Backward 
Art  of  Spending  Money,"  by  W.  C.  Mitchell. 

2T.  Veblen,  "Theory  of  the  Leisure  Class,"  p.  104. 


Markets — Their  Principles  and  Strategy     359 

what  they  consider  taboo,  everybody  inclines  to  consider 
taboo. 

The  pathways  of  entrance  to  this  class  are  open  to  all 
comers.  The  inheritance  of  fortune  places  not  a  few  people 
there,  but  there  are  constant  accessions  of  successful  busi- 
ness and  professional  men  and  women  who  have  worked 
their  way  from  the  bottom  to  the  top,  from  speculators 
whom  luck  has  favored,  from  small  tradespeople  who  have, 
by  a  lifetime  of  work  and  saving,  made  the  necessary  prop- 
erty accumulation.  Thousands  of  accessions  have  occurred 
among  those  who  are  rather  loosely  and  often  inaccurately 
called  the  *  *  war-made  millionaires. ' '  But  it  takes  a  genera- 
tion or  so  for  newcomers  to  become  assimilated  into  all  the 
manners  and  conventions  of  the  most  influential  class. 
There  is  usually  a  difference,  obvious  enough  and  many 
times  humorous,  between  the  nouveau  riche  and  those 
"born  to  the  purple."  The  latter  class  inherit  not  merely 
the  income  proper  to  the  class,  but  also  the  bringing  up  in 
a  home  and  community  environment  which  assures  that 
from  youth  up,  their  breeding  will  make  it  natural  and 
easy  for  them  to  embody  the  virtues,  traditions,  forms, 
canons  and  standards  of  the  class.  A  historical  examina- 
tion of  the  origins  of  a  goodly  portion  of  these  class  stand- 
ards of  consumption  would  lead  back  to  the  institutions  of 
Europe, — ^the  Europe  of  courts,  estates,  barons,  counts,  and 
kings.  It  is  not  easy  for  interlopers  to  orient  themselves 
overnight  in  this  historical  background,  and  to  behave 
gracefully  in  the  midst  of  the  new  class  psychology.  The 
parvenu  is  notoriously  clumsy  and  absurd  in  his  attempts 
to  adapt  himself  to  the  ways  of  the  class,  and  not  infre- 
quently makes  a  ludicrous  botch  of  the  attempt.  It  is  neces- 
sary then  to  conceive  of  this  class  which  more  than  any 
other  sets  the  canons  of  consumption  as  an  institution  in 
itself,  with  class  traditions  and  class  psychology,  with  a  con- 
tinuity unbroken  from  generation  to  generation,  with  a 
class  self-consciousness  and  a  distinctive  group  self-asser- 
tiveness. 

The  motives  in  the  consumption  of  all  goods,  whether  by 
the  most  well-to-do  or  the  less  well-to-do,  are  guided  by  two 


360     Markets — Their  Principles  and  Strategy 

aspects  of  the  goods.  On  the  one  hand,  there  must  be  a 
certain  base  line  of  plain  food  value  to  satisfy  primitive 
hunger;  a  certain  minimum  of  warmth-giving  quality  or 
body-covering  quality  in  all  forms  of  clothing;  a  certain 
indispensable  protection  from  the  elements  in  all  forms  of 
housing;  a  certain  serviceability  in  all  forms  of  furniture; 
a  certain  minimum  of  plain,  simply  utility  to  sustain  life 
and  satisfy  the  imperative  human  wants.  But  on  the  other 
hand,  all  consumption  except  the  rarest  and  crudest,  re- 
quires in  the  food,  clothing,  housing,  furniture  and  the  like, 
a  substantial  element  of  style,  fashion,  culture  and  taste. 
This  element  in  all  consumption  is  in  part  of  course  a  con- 
cession to  the  artistic  cravings  of  the  human  spirit,  but  in 
ordinary  life  it  is  probably  much  more  an  expression  of  the 
profound  human  bent  to  ape  the  standards  of  consump- 
tion which  command  prestige  and  admiration.  Goods  are 
bought,  then,  partly  for  the  service  which  they  will  give  to 
the  user,  but  also  for  the  extent  to  which  they  will  give  the 
satisfaction  that  comes  from  being  in  style.  As  incomes 
increase,  the  search  for  elements  of  style  and  prestige  be- 
comes greater  and  greater,  until  the  upper  limits  of  lavish 
display  of  wealth  are  reached.  When  the  charge  is  made 
that  what  troubles  people  is  not  so  much  the  high  cost  of 
living  as  the  cost  of  high  living,  what  is  really  implied  is 
that  people  are  spending  their  incomes  for  the  style,  showi- 
ness,  display  of  goods  more  than  for  their  direct  service- 
ability. 

Style  and  display  follow  standards  which  hold  sway 
among  the  most  well-to-do.  And  among  the  most  well-to- 
do,  those  who  constitute  the  so-called  leisure  class  really  set 
the  pace  for  consumption  standards.  To  a  very  large  de- 
gree, the  standards  which  prevail  there  refer  to  extraordi- 
nary luxury,  to  impressive  expensiveness,  to  costly  leisure, 
to  a  rapid  fluctuation  of  vogues,  modes  and  styles.  The 
extravagance  of  the  poor,  the  race  to  ''keep  up"  with  one's 
set,  the  desperate  determination  to  buy  those  things  which 
are  expected  of  one  in  one's  position,  the  prudence  of  an 
ever-growing  proportion  of  the  higher  income  classes  in 
refraining  from  having  children  lest  the   extra  expense 


Markets — Their  Principles  and  Strategy     361 

might  require  the  giving  up  of  the  most  flattering  standard 
of  living, — all  this  has  to  be  studied  as  a  part  of  the  insti- 
tution of  social  classes.  The  instincts  expressed  in  display, 
prestige,  social  approval,  distinction,  and  reputation,  are 
the  driving  human  forces  behind  all  such  spending  stand- 
ards ;  and  the  tendencies  toward  imitation,  habit  formation, 
suggestibility,  and  crowd-mindedness  are  the  directing  in- 
fluences in  these  phases  of  consumers'  behavior.^ 

In  the  face  of  these  psychological  forces,  the  frugal  vir- 
tues make  discouraging  headway.  As  Thorndike  remarks, 
"There  are  working  against  thrift,  the  very  strong  original 
tendencies  toward  gratifying  the  gross  sensory  appetites, 
and  toward  display,  mastery  and  approval."  Thrift  can- 
not be  made  to  appeal  to  the  imagination  of  the  masses 
forcibly  except  as  they  are  tempted  to  imitate  thrift  on  the 
part  of  the  classes  which  command  prestige.  Precisely  be- 
cause "the  habit  of  aping  the  expenditure  of  those  better 
off  than  ourselves  is  pathetically  general,"^  it  is  true  that 
the  formation  of  new  habits  of  aping  the  economy  and 
thrift  of  those  better  off  than  ourselves  is  the  only  broad 
road  to  successful  thrift.  Hence,  the  admonition  of  Thorn- 
dike  is  thoroughly  constructive:  "Thrift  should  then  be 
begun  with  the  rich,  important,  able,  and  popular.  So 
long  as  it  is  advocated  as  the  virtue  of  the  poor  and  lov/ly, 
the  young  and  struggling,  the  propaganda  will  be  largely 
self-destructive.  ...  If  the  world  as  a  whole  is  to  be  effi- 
cient, its  mighty  ones  must  distinguish  sharply  between 
expense  for  efficiency  and  expense  for  display,  and  leave  the 
latter  to  peacocks,  monkeys,  the  feeble-minded  and  women 
w^ho  have  to  make  themselves  salable."^  The  institution 
of  social  classes,  therefore,  controls  frugality  as  well  as 
extragavance.  Genuine  thrift  among  the  masses  must  wait 
until  conspicuous  thrift  and  saving  are  as  prominent  among 
the  classes  of  greatest  income  as  conspicuous  luxury  and 
waste  often  are  at  the  present  day. 

1  See  Cooley,  "Social  Process,"  pp.  303-334;  Carver,  "Principles  of 
Political  Economy,"  pp.  48-49;   Sumner,  "Folkways,"  pp.  45-47. 

2  Hartley  Withers,  AnnaU  of  the  American  Academy,  Vol.  87,  p. 
231. 

3  E.  L.  Thorndike,  "Psycholof^ical  Notes  on  the  Motives  for  Thrift," 
Annals  of  the  American  Academy,  Vol.  87,  pp.  213-218. 


362     Markets — Tlieir  Principles  and  Strategy 

Technology  for  Guidance  of  Consumption 

There  are  three  main  methods  in  vogue  for  the  control 
and  shaping  of  consumers'  demands  and  expenditures, — 
private  business  agencies,  consumers'  co-operative  agencies, 
and  political  agencies. 

The  first  of  these,  private  business  agencies,  has  already- 
been  discussed  at  length  in  the  section  on  demand  creation, 
advertising,  and  salesmanship.  Business  men  do  not  trust 
to  consumers  to  buy  what  they  please,  but  at  no  small  ex- 
pense they  carry  on  advertising  and  selling  campaigns  to 
control  the  channels  in  which  consumers  shall  spend  their 
incomes. 

The  second  agency,  consumers'  co-operative  adventures, 
are  the  outcome  of  the  feeling  of  the  individual  consumer 
that  he  is  utterly  helpless.  He  buys  what  he  finds  in  the 
stores,  pays  the  price  which  he  has  to,  and  comes  away 
with  the  feeling  that  he  is  at  the  mercy  of  some  market 
juggernaut.  Consumers'  leagues  and  co-operative  stores 
have  been  undertaken,  but  as  yet  have  not  been  applied  on 
nearly  so  wide  a  scale  as  they  have  in  a  number  of  Euro- 
pean countries.  Consumers'  co-operative  efforts  have  demon- 
strated their  efficacy  and  are  strongly  significant  as  an  in- 
dication of  the  feeling  of  protest  in  the  minds  of  large 
numbers  of  consumers,  and  of  the  desire  to  assert  their  in- 
dividual Avants  by  a  collective  agency. 

The  third  agency,  political  and  legislative  control,  is 
highly  important.  A  recent  writer  on  political  science  has 
observed,  "Polities  is  becoming  the  chief  method  by  which 
the  consumer  enforces  his  interests  upon  the  industrial 
system.  .  .  .  Business,  then,  must  look  forward  to  increas- 
ing control  in  the  interests  of  those  who  buy.  Processes 
will  be  inspected,  and  regulated  by  law,  some  industries  will 
be  operated  directly  by  the  government."^  One  of  the 
foremost  political  interferences  with  consumers'  expendi- 
ture is  the  method  of  taxation.  Inheritance  taxes,  income 
taxes,  excess  profits  taxes  tend  to  divert  a  considerable 
share  of  large  incomes  into  public  uses,  and  consumption 

iW.  Lippman,  "Drift  and  Mastery,"  pp.  71,  75. 


Markets — Tlieir  Principles  and  Strategy    363 

taxes,  indirect  taxes,  tariffs  and  imposts  tend  to  appro- 
priate relatively  larger  shares  of  the  incomes  of  the  mass 
of  people  to  public  uses.  A  great  number  of  bureaus,  main- 
tained by  federal,  state,  and  municipal  authorities,  are 
devoted  to  education  of  people  to  wise  use  of  income.  Public 
Health  Bureaus,  Cost  of  Living  Commissions,  Children's 
Departments,  Welfare  Committees,  Marketing  Bureaus, 
and  other  like  bodies,  are  engaged  in  publicity,  propaganda, 
and  organizing  activity  for  the  purpose  of  improving  con- 
sumers' demand.  Municipal  parks,  playgrounds,  beaches 
and  libraries  are  created  to  make  it  easy  for  people  to  spend 
their  income  for  leisure  enjoyments  in  as  wholesome  a  man- 
ner as  possible.  Legislation  is  common  to  prevent  people 
who  by  nature  are  easily  gullible,  from  falling  the  victims 
of  wild-cat  adventures  in  stock  speculation  and  of  swindlers 
of  every  sort.  Laws  are  on  the  statute  books  against  the 
spending  of  money  in  gambling,  lotteries,  and  games  of 
chance.  In  various  forms  there  has  come  into  being  a  body 
of  political  agencies  to  encourage  the  intelligent  and  bene- 
ficial spending  of  money,  and  to  discourage  or  to  forbid 
foolish  and  harmful  spending. 

Consumers'  demand,  when  viewed  from  all  these  points 
of  view,  is  not  a  settled  and  finished  fact,  immune  from 
criticism,  and  entitled  to  unbridled  laissez  faire.  The  using 
of  wealth  is  the  end  and  aim  of  the  producing  of  wealth, 
and  if  it  is  used  badly,  its  production  to  begin  with  was  a 
waste  and  a  futility.  All  too  widespread  has  been  the 
assumption  that  anybody  was  justified  in  making  poor 
goods,  or  goods  which  could  only  bring  harm  to  the  con- 
sumer, provided  he  was  clever  enough  to  find  buyers;  and 
that  if  the  buyers  were  foolish  or  ignorant  enough  to  buy 
such  goods,  it  was  their  own  fault,  and  they  deserved  to 
suffer  the  consequences.  Nobody  was  supposed  to  be  his 
brother's  keeper  in  any  affair  which  touched  the  spending 
of  his  brother's  income.  Maximum  production  has  been 
extolled  as  the  supreme  virtue  without  much  concern  as  to 
what  it  was  that  was  to  be  produced.  Hence  much  pro- 
duction has  been  of  a  sort  that  degraded  men  in  the  con- 
suming.    It  is  encouraging  therefore  that  the  tendency  is 


364    Markets — Their  Principles  and  Strategy 

appearing  positively  to  treat  the  spending  of  income  as  a 
province  wherein  the  methods  of  scientific  analysis  apply. 
Only  by  knowing  why  consumers  behave  as  they  do,  and  by 
understanding  how  their  behavior  can  be  redirected  advan- 
tageously, can  the  modern  economic  community  acquire  an. 
intelligent  self-control. 


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Scott,  W.  D.:  The  Psychology  of  Advertising;  Influencing  Men 
in  Business;  Theory  and  Practice  of  Advertising 

Hollingworth  :  Advertising  and  Selling 

Frederick,  J.  G. :   Modern  Sales-Management 

Paton  and  Stevenson:  Principles  of  Accounting 

Nystrom:  The  Economics  of  Retailing 

Emery,  H.  C. :  The  Tariff  and  the  Ultimate  Consumer;  Amer- 
ican Economic  Review,  Vol.  5,  pp.  534-551 

Compton,  W.  :  Price  Problem  in  Lumber  Industry,  American 
Economic  Review,  Vol.  7;  p.  582 

Wright,  P.  G. :  Value  Theories  Applied  to  Sugar  Industry, 
Quarterly  Journal  of  Economics,  Vol.  30,  p.  101 

Tosdel,  H.  R.  :  Open  Price  Associations,  American  Economic 
Review,  Vol.  7,  p.  331 

Boyle,  J.  E.:  Marketing  of  Agricultural  Products,  American 
Economic  Review,  Vol.  11,  p.  207 

Clark,  F.  E.:  Criteria  of  Marketing  Efficiency,  American  Eco- 
nomic Review,  Vol.  II,  p.  214. 

Taussig,  F.  W.:  Price  Fixing,  Quarterly  Journal  of  Economics, 
February,  1918,  p.  240  ff. 


Markets — Their  Principles  and  Strategy    365 

Simpson,  Kemper:  Price  Theories,  Quarterly  Journal  of  Eco- 
nomics, Vol.  35,  p.  287  ff. 

HiGHAM,  C.  F.:  Scientific  Distribution 

Putnam,  G.  E.  :  Journal  of  Political  Economy,  Vol.  29,  p.  297  ff. 

Veblen,  T.:  Theory  of  the  Leisure  Class 

Cherington:   Elements  of  Marketing 

CoOLEY,  C.  H.:  Social  Process 

Tipper  and  others:   Principles  of  Advertising 

Whitehead,  H.:  Principles  of  Salesmanship 

IVEY,  P.  W. :  Elements  of  Retail  Salesmanship 

Kitson,  H.  D.:  The  Mind  of  the  Buyer 

Weld,  L.  D.  H.:  The  Marketing  of  Farm  Products 

Macklin,   T.:    Efficient   Marketing  for   Agriculture 

Shaw,  A.  W. :  Some  Problems  in  Market  Distribution 

Douglas,  Paul  and  Dorothy,  and  Joslyn,  C.  S.:  What  Can  a 
Man  Afford?  American  Economic  Review,  Sup.  2,  Decem- 
ber, 1921 

Friday,  David:  An  Extension  of  Value  Theory,  Quarterly  Jour- 
nal of  Economics,  Vol.  36  If.,  197-220 


CHAPTER  X 

MONEY  AND   CREDIT:    THEIR  SERVICES   AND   DANGERS 

The  universal  unit  of  measurement  for  the  elements  of 
the  economic  order  is  money.  The  language  of  business 
is  always  dollars  and  cents.  Labor  works  for  a  money 
wage,  capital  invests  money  for  a  money  return,  manage- 
ment assembles  all  the  factors  of  production  in  terms  of 
money  costs  and  money  gains,  the  market  buys  and  sells  at 
a  money  price,  finance  is  the  institution  of  money  itself. 
Every  business  element  has  to  be  translated  into  terms  of 
dollars  and  cents  before  business  men  can  calculate  about 
profit  or  loss.  The  various  steps  and  particles  of  the  eco- 
nomic system  must  have  a  money  price  tag  placed  upon 
them  before  they  can  play  a  part  in  economic  life.  By 
thus  reducing  economic  elements  to  a  common  language  the 
money  unit  of  measure  serves  as  a  great  unifying  and  or- 
ganizing factor  in  economics. 

A  price  system  exists  when  all  economic  services,  com- 
modities, or  transactions  are  measured  in  value  by  some 
medium  of  exchange.  The  assortment  of  specialized  .serv- 
ices, tasks  and  functions  has  become  so  vast  and  intricate 
only  because  each  separate  item  could  be  brought  within 
the  comprehensive  price  regime.  In  most  modern  coun- 
tries, these  units  of  money  price  are  such  as  the  dollar,  the 
pound  sterling,  the  franc,  the  mark,  etc.  In  an  economic 
system  based  upon  money  prices,  all  economic  activity  has 
to  be  reduced  to  a  price  term.  This  fact  makes  possible  the 
minute  subdivision  of  labor,  the  division  of  tasks,  the  use  of 
machinery  on  a  large  scale  and  the  consequent  increase  of 
production. 

Note — ^The  purpose  of  this  spction  is  not  to  give  a  technical  ac- 
count of  the  detailed  processes  of  banking  and  exchange,  but  to 
describe  some  of  the  main  elements  in  the  structure  of  money  and 
credit  institutions.  The  subject  involves  many  intricacies  and  much 
detailed  analysis,  and  it  is  difficult  to  sort  out  those  central  and 

366 


Money  and  Credit  367 

The  far-reaching  consequences  can  best  be  understood 
only  after  the  chief  money  instruments  are  clearly  in  mind, 
and  their  functions  are  understood. 

The  precious  metals  have  been  important  money  mate- 
rials in  the  development  of  modern  price  systems,  and  the 
most  important  of  the  metals  has  been  gold.  In  the  United 
States  at  present,  23.22  grains  of  pure  gold  enter  into  the 
dollar.  For  coinage  purposes,  a  copper  alloy  is  used,  so 
that  the  actual  dollar  contains  25.8  grains  of  gold  nine- 
tenths  fine.  An  act  of  Congress  definitely  establishes  that 
amount  of  gold  as  the  content  of  the  dollar.  Likewise  any- 
one holding  a  dollar  in  any  form  of  money  holds  the  equal 
of  23.22  grains  of  pure  gold.  If  a  person  has  the  raw  gold 
he  can  take  it  to  the  United  States  Government  and  have  it 
converted  into  gold  coins.  This  free  coinage  insures  that 
the  ratio  between  the  value  of  the  gold  as  raw  metal  and 
the  value  as  money  coin  shall  remain  constant.  Free  coin- 
age exists  for  gold  alone  and  for  no  other  metal  in  this 
country,  and  this  exclusive  right  of  gold  is  the  factor  which 
establishes  gold  as  the  single  standard  of  value  in  our  price 
system. 

The  advanced  economic  systems  of  the  present  time  are 
organized  under  a  price  system  upon  the  principle  of  the 
single  standard.  A  century  ago,  only  one  country,  Eng- 
land, had  adopted  the  single  standard,  but  within  the 
century  the  new  principle  has  received  wide  acceptance. 

The  alternative  was  bimetallism,  in  which  gold  and  silver 
usually  were  the  standard  metals.  The  reason  for  the  gen- 
eral abandonment  of  the  bimetallic  standard  appears  in  the 
experience,  for  example,  of  the  United  States.  The  Ameri- 
can bimetallic  system  began  by  establishing  free  coinage  of 
both  silver  and  gold  at  the  ratio  of  15  to  1.  That  is  to  say, 
one  ounce  of  gold  would  be  coined  into  the  same  amount  of 

basic  elements  which  pive  a  substantially  true  and  accurate  descrip- 
tion, a  description  which  is  brief  yet  adequate  to  enable  the  student 
to  grasp  the  important  problems  of  finance.  The  elTort  has  been 
made,  however,  and  it  is  hoped  that  the  account  of  tlie  financial  in- 
stitution will  be,  in  spite  of  the  unavoi(Uible  condensation  and 
brevity,  sufficiently  coniproliensive  to  give  the  student  liis  financial 
bearings  in  his  economic  thinlcing. 


368  Money  and  Credit 

money  as  fifteen  ounces  of  silver.  But  gold  proved  to  be 
worth  more  for  other  purposes  than  in  coins,  with  the  result 
that  very  little  gold  was  brought  to  the  mints  for  coinage 
purposes.  The  ratio  was  therefore  changed  to  16  to  1/  but 
under  the  new  ratio  it  was  found  that  it  paid  the  holders 
of  gold  to  coin  their  metal  whereas  it  did  not  pay  the  hold- 
ers of  silver.  Silver  was  worth  more  as  bullion  in  the  open 
market  than  in  coins,  and  hence  very  little  silver  found  its 
way  to  the  mints.  The  coinage  ratio  between  the  two  metals 
could  not  be  made  to  correspond  with  the  actual  market 
ratio.  Wherever  the  bimetallic  standard  is  tried,  this  diffi- 
culty gives  rise  to  what  is  known  in  economics  as  Gresham's 
law,  namely,  that  when  the  market  ratio  of  the  bullion  of 
the  two  metals  does  not  correspond  with  the  nominal  ratio 
of  coinage,  the  metal  overvalued  at  the  mint  will  tend  to 
drive  the  other  from  circulation.  The  free  coinage  of  silver 
was  abandoned  in  the  United  States  in  1873.  Two  subse- 
quent acts  of  Congress,  the  Bland  Allison  act  of  1878  and 
the  Sherman  Act  of  1890,  authorized  the  coinage  of  a  lim- 
ited amount  of  silver  under  certain  restrictions.  The 
United  States  has,  by  Act  of  Congress,  been  definitely  under 
the  single  gold  standard  since  1900.^ 

Gold  is  therefore  the  standard  of  value  in  the  price  sys- 
tem. A  bushel  of  wheat  is  compared  in  value  with  a  pound 
of  tea  by  comparing  the  amounts  of  gold  for  which  each 
will  exchange.  The  money  price  is  the  index  of  the  eco- 
nomic value  of  any  service  or  commodity  or  piece  of  prop- 
erty in  relation  to  all  other  services,  commodities  and 
properties.  The  value  of  anything  and  everything  is  meas- 
ured by  comparison  with  the  standard  gold  dollar,  and  this 
standard  is  the  universal  unit  of  economic  measurement 
throughout  the  price  system. 

Subsidiary  Metallic  Money 

There  is  a  subsidiary  or  token  metallic  money  which  cir- 
culates and  performs  the  services  of  purchase  and  sale,  and 

1  16  to  1  is  approximate;  the  exact  ratio  is  15.9SS  to  1. 

-  Except  for  certain  special  legislation  permitting  limited  coinage 
of  silver,  the  United  States  has  been  on  a  gold  basis  since  1873. 
Bimetallism  is  now  mainly  a  matter  of  historical  interest. 


'  Money  and  Credit  369 

which  is  accepted  in  payment  because  it  is  redeemable  in 
gold.  "We  have  in  the  United  States,  for  example,  the  silver 
dollar,  the  half-dollar,  the  quarter,  the  dime,  the  nickel  and 
the  one-cent  piece.  None  of  these  coins  contains  actual 
raw  silver,  nickel,  or  copper  equal  in  value  to  the  figure 
stamped  on  the  face  of  the  coin.  If  the  coins  were  melted 
and  the  bullion  sold  in  the  metal  market,  the  selling  price 
would  be  only  a  fraction  of  the  face  value  which  they  are 
given  in  the  coin.  Yet  they  circulate  freely,  the  reason 
being  that  they  are  redeemable  in  gold  at  their  full  face 
value  and  that  they  are  legal  tender  up  to  certain  amounts. 

Those  forms  of  money  are  legal  tender  which  the  law 
requires  people  to  accept  in  payment  of  debts.  Gold  is 
legal  tender  in  any  amount,  but  the  subsidiary  coins  in  only 
limited  amounts.  An  exception  must  be  made  of  silver  dol- 
lars, which  are  legal  tender  in  any  amount,  except  when 
otherwise  stipulated  in  a  contract.  The  smaller  silver  coins 
are  legal  tender  to  the  amount  of  ten  dollars,  and  nickels 
and  pennies  to  the  amount  of  twenty-five  cents.  The  metal 
coins  must  be  accepted  in  payment  of  contracts  or  debts  to 
these  amounts. 

The  inconvenience  of  carrying  heavy  and  bulky  coins  is 
obviated  by  the  use  of  various  forms  of  government  paper 
money.  In  popular  knowledge,  this  paper  money  is  simply 
the  dollar  bill,  the  five-dollar  bill,  and  bills  of  other 
amounts.  However,  the  paper  bills  have  different  origins. 
Some  are  gold  certificates,  with  a  dollar  of  gold  reserve  in 
Government  vaults  for  every  dollar  of  paper.  Some  are 
silver  certificates,  with  a  silver  dollar  in  reserve  in  Govern- 
ment vaults  for  each  paper  dollar  in  circulation.  The 
paper  money  is  redeemable  in  metal  coin  on  demand,  and 
is  legal  tender  in  the  same  way  as  the  respective  coin. 

We  have  also  as  paper  money  government  notes  which 
are  not  backed  by  a  metal  reserve  equal  to  the  full  face 
value  of  the  notes.  The  partial  reserve  is  practicable  be- 
cause only  a  fraction  of  the  paper  bills  will"  be  presented 
for  redemption  at  any  one  time.  Legally,  the  full  issue  of 
paper  money  is  convertible  into  specie,  but  this  legal  pro- 
vision is  made  only  because  in  actual  practice  the  Govern- 


370  Money  and  Credit 

ment  is  called  upon  to  redeem  only  a  small  amount  at  a 
time.  Treasury  Notes  of  1890,  redeemable  in  gold  coin,  and 
the  so-called  greenbacks  issued  during  the  Civil  War,  re- 
deemable likewise  in  gold  coin  are  paper  money  issues  of 
this  partial  reserve  type.^ 

A  third  type  of  paper  money  is  sometimes  resorted  to, 
namely  fiat  or  inconvertible  money.  Government  paper 
money  of  this  type  has  no  reserve  of  metal,  not  even  a  par- 
tial reserve.  It  is  not  redeemable  in  any  standard  of  value. 
The  United  States  at  present  has  no  fiat  money  in  circula- 
tion. The  greenbacks  when  first  issued  were  fiat  paper 
money,  and  the  fact  that  they  were  not  redeemable  caused 
their  purchasing  power  to  depreciate  far  below  their  face 
value.  "When  they  were  made  redeemable  in  1879,  their 
purchasing  power  rose  to  the  par  of  the  face  value.  Most 
Governments  are  disposed  to  avoid  fiat  paper  except  in  case 
of  war  emergency.  Germany  floated  huge  inconvertible 
paper  issues  during  and  following  the  World  War,  The 
war  inflation  in  England 's  currency  has  undermined  the  re- 
lation between  her  paper  money  and  gold  reserves,  and  has 
left  her,  for  a  time,  at  least,  on  an  inconvertible  basis.  The 
Russian  Bolshevik  Government  in  1920  had  already  issued 
in  Russian  money  an  equivalent  of  eighty  billion  dollars  in 
irredeemable  paper  money.  Continental  Europe  at  the  end 
of  the  war  was,  in  general,  using  money  which  could  not  be 
redeemed  in  the  gold  standard.  The  situation  would  ap- 
pear, however,  to  be  temporary  and  Europe  appears  likely 
to  attempt  to  get  back  to  a  redeemable  standard  gradually 
and  ultimately.  The  fiat  principle  does  not  commend  it- 
self as  safe  and  acceptable  to  the  modern  capitalistic  eco- 
nomic systems. 

In  the  United  States  to-day,  therefore,  all  forms  of  money 
issued  by  the  Government  refer  to  gold  ultimately  as  the 
standard  of  value.  The  money  forms  have  general  accept- 
ability in  price  transactions.  Also  they  are  legal  tender 
by  Government  authority  and  are  backed  ultimately  by 
gold  reserves.    Obviously  the  value  of  the  gold  in  the  dollar 

iSee  pp.  406-411  for  forms  of  paper  money  under  Federal  Reserve 
Banking  System. 


Money  and  Credit  371 

thus  stands  as  the  unit  standard  of  value  for  the  measure- 
ment of  all  price  relations,  and  directly  or  indirectly, 
through  the  various  subsidiary  and  paper  money  instru- 
ments, the  money  medium  of  the  price  system  is  main- 
tained. 

Although  these  forms  of  money  establish  a  standard  of 
value  for  the  price  system  as  a  whole,  nevertheless  they 
constitute  only  a  very  small  part  of  the  actual  medium  of 
exchange.  About  nine-tenths  of  all  business  transactions 
take  place  without  the  circulation  of  any  of  these  money 
instruments.  The  great  bulk  of  business  is  done  by  credit 
instruments.  Credit  allows  people  to  secure  goods  now  and 
to  pay  for  them  later  on.  It  means  essentially  the  same 
process  as  borrowing.  A  seller  trusts  a  buyer  for  payment 
in  the  future.  Or  a  buyer  pays  a  seller  immediately  with 
money  borrowed  from  a  bank  to  be  repaid  later.  The  va- 
rious instruments  for  the  application  of  the  principle  of 
credit  serve  the  huge  majority  of  all  price  transactions. 
In  the  forepart  of  the  last  century,  credit  was  of  small 
importance,  but  to-day  it  is  of  dominating  'importance 
throughout  the  price  system.  The  credit  system  is  a  recent 
creation  and  has  come  about  in  response  to  the  pressing 
needs  of  the  highly  specialized  economic  system  resting 
upon  machinery  and  applied  science.^ 

Banking  institutions  have  developed  as  agencies  for  the 
handling  of  credit  and  money  instruments.  The  paramount 
attention  of  commercial  banks  is  devoted  to  the  operation 
of  the  credit  system.  Not  all  banks  are  commercial  banks. 
Some  are  investment  banks,  some  are  savings  banks,  some 
are  trust  companies,  etc.  But  the  banks  of  central  im- 
portance in  the  conduct  of  credit  operations  are  the  com- 
mercial banks,  and  hence  the  following  description  of  the 
relation  of  commercial  banks  to  credit  control  should  be 
understood  as  a  description  at  the  outset  of  the  pivotal  part 
of  credit  institutions.  This  does  not  mean  that  all  commer- 
cial credit  passes  through  the  hands  of  bankers,  but  inas- 

iSee  Scott,  "Money  and  Bankinf^,"  1916,  pp.  92-94;  also  Lausjhlin, 
"Credit  of  Nations,"  pp.  8-12,  and  Chapter  II;  and  H.  G.  Moulton, 
"Financial  Organization  of  Society,"  Chapter  IX. 


372  Money  and  Credit 

much  as  most  commercial  credit  does  involve  banking  opera- 
tions, it  will  be  clearer  and  more  accurate  to  study  commer- 
cial credit  in  connection  with  commercial  banks,  and 
incidental  forms  of  commercial  credit  which  do  not  involve 
banking  can  be  noted  adequately  in  passing. 

Commercial  credit  may  be  classified  in  three  major  forms, 
namely,  open  accounts,  promises  to  pay,  and  orders  to  pay/ 

Open  accounts  are  often  called  book  accounts,  and  take 
place  with  or  without  banking  activities.  An  example  of 
open  accounts  carried  on  without  the  direct  aid  of  a  bank 
is  the  very  familiar  process  of  ''charging"  goods  bought 
from  a  grocery  store.  The  grocer  keeps  on  his  books  a 
record  of  all  goods  bought  by  each  customer,  and  at  regular 
intervals,  probably  every  month,  balances  up  the  total  price 
of  the  goods  bought  and  the  total  amount  of  payments  made 
by  the  customer  during  the  month.  The  balance  o\^ang  the 
grocer  is  then  paid,  possibly  in  money,  more  often  in  the 
form  of  a  check  dra^AOi  on  the  customer's  banking  account. 
If  checks  are  used,  then  a  process  of  open  accounts  with  a 
bank  is  involved.  The  customer  pays  most  of  his  bills, 
grocery  and  otherwise,  by  checks,  and  at  the  same  time  he 
is  constantly  receiving  checks  from  people  who  owe  him  in 
settlement  of  their  debts.  These  checks  which  he  receives 
from  others  he  deposits  from  time  to  time  at  the  bank.  The 
books  of  the  bank  make  a  record  of  all  that  the  man  de- 
posits and  all  that  he  draws  out,  and  from  time  to  time  the 
bank  gives  him  notice  of  the  balance.  A  large  part  of  the 
purchases  of  retail  dealers  from  jobbers  are  financed  by 
book  credit.  The  jobber  carries  the  retailer's  account  on 
his  books  for  a  certain  period  of  time.  This  open  account 
is  in  the  nature  of  a  loan  to  the  retailer  for  the  period  in- 
volved and  is  a  common  form  of  credit. 

Promises  to  pay  take  many  forms,  such  as  promissory 
notes,  bank  notes,  or  government  notes.  The  government 
paper  money  already  described  is  in  the  nature  of  a  promise 
by  the  Government  to  pay  on  demand  gold  or  other  stand- 
ard money.    Banks  are  allowed  to  issue  notes  for  circula- 

1  Scott,  "]\Toney  and  Banking,"  p.  95 ;  Moulton,  "Financial  Organi- 
zation," p.  163. 


Money  and  Credit  373 

tion,  which  are  similar  promises  to  pay  to  the  bearer  on 
demand  a  certain  sum  of  money.  A  promissory  note  is  a 
person's  signed  legal  promise  to  pay  at  some  future  date  a 
certain  sum  to  another  party.  Most  promissory  notes  are 
settled  eventually  not  by  the  passing  of  specie  or  Govern- 
ment paper  money,  but  by  further  credit  devices.  For 
instance,  a  check  is  drawn  in  payment,  and  the  person  re- 
ceiving pajTiient  deposits  the  check  at  the  bank,  where  it  is 
recorded  in  the  regular  process  of  accounting  by  the  bank. 
The  third  form  of  commercial  credit,  the  order  to  pay,  is 
commonly  knowTi  among  business  men  as  the  bill  of  ex- 
change or  draft.  Suppose  a  wholesale  merchant  sells  to  a 
retailer  $10,000  worth  of  shoes.  The  retailer  cannot  pay 
cash, — in  fact  he  cannot  pay  for  the  shoes  until  he  has  in 
turn  sold  them  to  his  customers.  The  wholesaler  must  wait 
for  his  payment  until  the  retailer  has  had  a  chance  to  sell 
a  large  part  of  the  shoes.  To  take  care  of  the  deferred  pay- 
ment, the  wholesaler  writes  out  an  order  to  the  retailer  to 
pay  to  him  ten  thousand  dollars  at  the  end  of  a  stated 
period,  perhaps  three  months.  This  order  to  pay  is  a  credit 
instrument.  The  principle  and  method  involved  have  very 
wide  applications  in  business.  The  variety  of  applications 
will  be  explained  more  fully  later  in  the  section  on  banking. 

Banking  and  Commercial  Credit 

Production,  wholesaling,  retailing,  transportation,  all  are 
directly  dependent  upon  borrowing  in  some  form  for  their 
activities.  The  commercial  credit  operations  of  banks  pro- 
vide such  loans  for  borrowers,  and  this  is  the  paramount 
function  of  modern  banks. 

This  assertion  that  banks  exist  primarily  for  the  purpose 
of  lending  money  does  not  square  with  a  widespread  popu- 
lar notion  of  banking.  The  popular  conception  often  seems 
to  be  that  a  bank  is  a  place  to  put  money  for  safe  keeping, 
perhaps  to  draw  a  small  rate  of  interest.  A  bank  is  thought 
of  as  a  place  w^here  anybody's  surplus  cash  can  be  de- 
posited. Bank  deposits  are  thought  of  as  money  put  into  a 
bank.  It  is  true  that  this  storing  of  money  is  an  important 
function  of  banks,  but  under  the  modern  price  and  credit 


374  Money  and  Credit 

system,  a  new  function  has  developed  which  overshadows 
the  old  in  importance.  Under  the  new  function,  a  bank 
deposit  is  not  necessarily  money  which  a  customer  has  put 
into  the  bank,  but  is  a  borrowing  from  the  bank.  At  first 
thought,  it  seems  paradoxical  to  consider  a  loan  made  by 
the  bank  as  a  deposit  in  the  bank.  The  apparent  contra- 
diction gives  rise  to  real  difficulty  in  understanding  the 
great  service  which  banks  render  to  the  business  community 
through  deposit  currency,  i.e.,  loans.^ 

The  loan  involves  a  sum  drawn  out  of  the  bank  for  a 
period  of  time  and  a  sum  put  into  the  bank  at  the  end  of 
the  stated  period  of  time.  The  loan  always  involves  the 
assurance  that  at  a  specified  date  the  borrower  will  return 
the  amount  of  the  loan  to  the  bank.  Hence,  immediately 
and  during  the  period  of  the  loan,  the  amount  of  the  loan 
is  assigned  to  the  borrower,  but  at  maturity  the  amount  of 
the  loan  is  something  coming  into  the  bank.  The  loan  in- 
volves a  promise  to  pay  into  the  bank  at  the  date  of  ma- 
turity the  sum  specified.  This  assured  payment  into  the 
bank  is  therefore  rated  as  a  deposit.  The  bank  always  has 
as  much  coming  in  as  the  amount  of  loans  put  out  with 
borrowers."  Hence  loan  deposits  are  on  the  one  hand  what 
is  due  the  borrowers  to  be  supplied  by  the  banks  and  on  the 
other  hand  what  is  due  the  banks  from  the  borrowers  when 
the  loans  are  paid  up. 

As  explained  in  the  Federal  Reserve  Bulletin,  "The 
naive  idea  that  a  bank  deposit  normally  originates  by  the 
bank's  customer  making  a  deposit  of  cash  in  the  bank  does 
not  reveal  the  substance  of  the  situation  in  countries  like 
the  United  States,  with  a  highly  developed  system  of  bank 
credit  and  its  utilization  through  the  form  of  the  deposit 
account.  The  most  usual  form  in  which  bank  deposits  orig- 
inate is  by  borrowers  going  to  a  bank  to  seek  accommodation 
and  offering  their  notes  for  discount,  the  bank  making  the 
loan  sought  by  the  customer  by  opening  a  credit  or  "de- 
posit" on  its  books  in  the  borrowers'  f^vor.     Normally, 

1  See  I.  Fisher,  "Purchasing  Power  of  Money,"  pp.  32-47. 

2  Also  the  bank  has  interest,  or  discount,  on  the  principal  of  the 
loan. 


Money  and  Credit  375 

therefore,  what  are  called  deposits,  increase  as  loans  and 
discounts  doj  in  other  words,  as  borrowings  from  banks 
increase, '  '^ 

Deposit  currency  is  the  chief  creation  of  commercial 
banking  and  a  clear  conception  of  its  workings  is  essential 
at  the  outset.  Deposit  currency  has  come  in  recent  years 
to  make  up  about  nine-tenths  of  the  actual  currency  circu- 
lation of  the  country. 

Deposit  currency  is  a  substitute  for  the  old  forms  of 
money.  The  new  form  has  come  into  being  because  it  has 
been  found  more  convenient  for  business  men  to  use.  It  is 
created  in  the  following  manner:  A  bank  has  to  begin 
with  a  certain  amount  of  money  as  a  foundation.  The 
capital  stock  represents  money  paid  in,  the  bank  building 
has  a  real  estate  money  value,  a  number  of  people  in  the 
community  have  left  money  with  the  bank  for  safe  keeping. 
Suppose  the  total  of  all  such  resources  amounts  to  $1,000,- 
000.  What  is  the  lending  pmver  of  the  bank  ?  Is  it  $1,000,- 
000?  As  a  matter  of  fact,  its  lending  power  is  much  more 
than  that  amount.  The  total  amount  which  the  bank  can 
lend  exceeds  many  times  over  the  total  amount  of  cash  and 
money  which  the  bank  possesses.  This,  too,  seems  paradox- 
ical, for  it  M'ill  be  asked,  how  can  a  bank  lend  that  which  it 
does  not  have?  If  the  total  funds  owned  by  the  bank  are 
only  $1,000,000  how  can  it  lend  more  than  that  amount? 
The  device  of  deposit  currency  accomplishes  the  task. 

A  deposit  loan  is  a  loan  which  gives  the  borrower  a  right 
to  draw  actual  money  from  the  bank,  with  the  tacit  expec- 
tation and  understanding  that  as  a  matter  of  real  practice, 
the  borrower  will  not  assert  the  right  and  will  not  draw  the 
actual  money  out.  Instead  of  asking  for  the  actual  money, 
the  borrower  will  use  the  loan  by  writing  cheeks.  To  make 
the  transaction  concrete,  a  definite  example  may  be  as- 
sumed. Suppose  the  Baldwin  Locomotive  Company,  the 
New  York  Central  Railroad,  and  the  Bethlehem  Stool  Com- 
pany each  borrows  $1,000,000  from  the  National  City  Bank 
of  New  York  City.  The  total  loan  made  by  the  National 
City  Bank  would  be  $3,000,000.     Assume  that  the  New 

1  September  1,  1919,  p.  815. 


376  Money  and  Credit 

York  Central  orders  $1,000,000  worth  of  locomotives  to  be 
made  by  the  Baldwin  Locomotive  Company,  and  that  the 
latter  buys  $1,000,000  worth  of  steel  for  its  needs  from 
the  Bethlehem  Steel  Company,  and  the  steel  company  buys 
$1,000,000  worth  of  raw  metal  for  its  needs.  How  are 
the  accounts  settled?  The  railroad  company  may  write  a 
check  on  the  National  City  Bank  ordering  the  bank  to  pay 
the  amount  of  the  $1,000,000  loan  to  the  locomotive  manu- 
facturers. The  bank  thereupon  transfers  on  its  records 
that  sum  to  the  account  of  the  Baldwin  Locomotive  Com- 
pany. Meantime  the  Baldwin  Locomotive  Company  meets 
its  debt  to  the  steel  company  by  writing  a  check  on  the 
National  City  Bank  for  the  amount  of  $1,000,000,  and  on 
the  records  of  the  bank  that  amount  is  transferred  to  the 
name  of  the  Baldwin  Company.  In  the  same  way,  the  Beth- 
lehem Steel  Company  meets  its  debt  by  writing  a  check  on 
the  bank,  as  a  result  of  which  its  loan  of  $1,000,000  is  put 
on  the  account  of  the  corporation  with  which  it  is  doing 
business.  The  paramount  feature  to  notice  is  that  money 
has  not  been  passing  around  directly  through  the  hands  of 
the  three  big  corporations.  They  did  not  see,  or  want,  or 
ask  for  gold  or  silver,  or  dollar  bills.  These  money  forms 
did  not  actively  enter  into  the  transaction.  Nor  need  the 
bank  have  had  in  its  vaults  $3,000,000  to  back  up  the  trans- 
action. A  fraction  of  that  amount  in  actual  money  would 
be  all  that  was  necessary.  The  deposit  loan  would  be  car- 
ried by  transferring  the  "right  to  draw  money"  from  the 
name  of  one  corporation  to  the  other.  The  actual  money 
would  never  be  touched.  By  the  use  of  cheeks,  the  bor- 
rowers could  direct  the  bank  to  transfer  the  right  to  the 
money  to  other  parties,  and  the  banks  could  record  the 
transfer  as  a  matter  of  book  accounting.  The  actual  money 
would  not  be  moved. 

It  is  natural  to  wonder,  then,  what  would  happen  if  the 
various  borrowers  should  all  go  to  the  bank  at  once  and 
demand  actual  money.  The  bank  has  given  them  one  and 
all  a  right  to  claim  actual  money,  and  yet  the  bank  does  not 
possess  anything  like  the  full  amount  itself,  "^^hat  would 
happen  if  all  these  borrowers  should  ask  for  gold  and  silver 


Money  and  Credit  377 

and  dollar  bills?  The  answer  is  that  the  whole  banking 
and  credit  system  is  built  upon  the  tacit  understanding  that 
the  borrowers  will  transact  their  business  by  check  and  will 
never  really  draw  the  actual  money  called  for  in  the  loan. 
This  broad  understanding  is  the  very  foundation  of  com- 
mercial banking,  and  the  custom  of  banking  and  commerce 
has  become  so  firmly  established  that  the  understanding  is 
as  much  a  dead  certainty  as  any  fact  in  economic  life.  At 
any  one  time,  only  a  few  borrowers  will  ask  for  actual 
money.  The  great  mass  of  loans  are  in  the  form  of  a  paper 
statement,  and  the  use  of  the  amount  mentioned  in  the  loan 
is  made  by  checks  instead  of  by  the  actual  passing  of 
money.  The  deep  confidence  that  all  borrowers  will  not 
ask  for  actual  money  at  once  makes  possible  the  carrying 
of  loans  by  the  bank  much  above  the  actual  cash  resources 
of  the  bank. 

In  the  foregoing  discussion,  the  general  principles  have 
been  mentioned,  but  no  statistical  estimate  has  been  made 
of  the  possible  ratio  between  cash  resources  of  all  the  banks 
of  the  country  and  the  deposit  loans  as  a  total.  The  cur- 
rency statistics  of  the  country  indicate  that  the  cash  re- 
sources of  the  whole  banking  community  may  be  as  small 
as  about  one-twentieth  of  the  deposit  currency.  The  lend- 
ing power  of  the  whole  banking  community  is  at  the  maxi- 
mum about  twenty  times  as  great  as  its  cash  resources.  Of 
course,  the  lending  power  is  not  always  used  to  the  maxi- 
mum. This  deposit  currency  is  credit,  and  by  this  agency 
the  countless  transactions  of  the  business  community  go 
forward,  and  the  price  system  functions.^ 

There  are  then  two  major  forms  of  deposits:  First, 
funds  actually  put  into  the  bank  by  customers,  and,  second, 
funds  borrowed  from  the  bank  by  customers ;  of  these  two, 
the  borrowed  funds  constitute  tlie  great  bulk.  Both  types 
of  deposits  are  handled  for  the  most  part  by  checks.  Checks 
are  quicker,  handier,  easier.  They  can  specify  any  odd 
amount  of  dollars  and  cents,  as,  for  example,  $1756.79,  with- 

1  For  the  country  as  a  whole,  the  percentase  of  cash  reserve  to 
total  deposits  varied  from  11.7  in  1913  to  6.6  in  1919.  See  E.  W. 
Kemmerer,  "High  Prices  and  Deflation,"  p.  28. 


378  Money  and  Credit 

out  the  nuisance  of  counting  out  that  amount  of  money. 
They  can  be  duplicated  if  lost,  and  they  can  be  made  pay- 
able to  particular  persons.  In  the  United  States,  checks  are 
used  in  making  over  90  per  cent,  of  all  payments.  They 
simplify  the  vast  array  of  price  transactions,  and  facilitate 
business  exchanges  to  the  amount  annually  of  about  $250,- 
000,000,000.  They  are  the  natural  instruments  for  the 
working  of  the  deposit  loan  system  of  credit  payments. 

This  explanation  of  deposit  currency  has  been  made  thus 
far  primarily  from  the  standpoint  of  the  banker,  but  for 
fuller  clearness  an  explanation  should  be  made  also  from 
the  point  of  view  of  the  customer  of  the  bank.  When  the 
business  man  or  the  corporation  carries  a  deposit  with  the 
bank, — a  deposit  of  the  type  which  involves  not  a  loan  but 
the  placing  of  funds  in  the  bank's  keeping, — the  fund  is 
used  to  meet  a  Avide  variety  of  bills  and  expenses  in  the 
business.  The  business  man  may  desire  to  pay  a  dozen 
different  concerns  for  raw  material  bought  from  them;  he 
may  desire  to  pay  a  score  of  bills  incurred  for  working 
capital;  he  may  desire  to  meet  his  regular  payroll  for 
labor ;  and  he  may  pay  them  one  by  one  by  means  of  checks. 
At  the  same  time,  the  business  man  has  payments  coming 
to  him  from  those  who  owe  him  money.  He  is  constantly 
receiving  checks  from  other  business  men  in  settlement  of 
their  debts  to  him.  As  these  come  in,  he  turns  them  over 
to  his  bank  to  be  recorded  on  his  account.  The  bank  serves 
as  a  kind  of  clearing  office  for  the  two  streams  of  payments, 
the  payments  going  out  and  the  payments  coming  in.  At 
certain  intervals,  the  bank  supplies  reports  of  the  amounts 
of  each,  and  gives  a  record  of  the  balance.  The  scores  of 
business  men  being  paid  by  the  customer  and  the  scores  of 
others  who  are  paying  him  what  they  owe  him,  are  using 
for  the  most  part  checks  based  on  bank  deposits  (or  other 
credit  instruments,  such  as  drafts,  bills  of  exchange,  accept- 
ances, etc.,  which  will  be  explained  later).  Actual  money 
is  not  being  passed  from  hand  to  hand.  Credit  instruments 
enable  the  banker  to  adjust  the  accounts  of  the  business 
man  by  recording  the  balance  of  receipts  over  expenditures. 
The  checks  show  who  would  be  entitled  to  the  actual  cash  if 


Money  and  Credit  379 

a  showdown  were  demanded,  and  the  bank  were  to  be  called 
upon  to  pay  up  with  the  money  itself,  and  these  check 
records  make  possible  a  book  account  in  the  bank  showing 
what  the  customer  has  paid  out  by  writing  checks  and  what 
he  has  received  by  cashing  checks  received  from  others. 
The  process  of  accounting  and  of  balancing  the  two  streams 
of  payments  without  the  actual  circulation  of  money  itself, 
economizes  the  use  of  money,  makes  the  system  of  price 
transactions  easier  and  simpler,  and  points  to  the  bank  as 
an  indispensable  servant  of  business  men. 

The  question  arises,  therefore,  How  is  the  bank  paid  for 
rendering  such  services!  The  banker  has  to  make  a  profit, 
and  since  the  major  nart  of  his  work  is  in  the  form  of 
handling  deposit  currency,  he  must  be  able  to  make  the 
substance  of  his  profit  from  that  process.  For  clearness, 
the  profit  from  the  two  types  of  deposits  may  be  considered 
separately.  First,  deposits  which  involve  the  actual  placing 
of  funds  in  the  keeping  of  the  bank  may  be  considered. 
The  bank  may  pay  a  sm.a^ll  rate  oLinterest  to  the  customer 
for  the  sake  of  having  the  f|inds  in  its  control,  and  then 
may  lend  the  funds  out  to  someone  else  at  a  highmi.  rate  of 
intexestr*  The  margin  between  the  two  rates  of  interest 
would  be  the  mar.tyin  for  profit.  But  the  funds  may  be 
placed  with  the'^nk  for  saie^eeping  and  for  convenience 
without  any  interest  being  paid  to  the  customer.  In  the 
latter  ease,  it  is  natural  to  wonder  whether  the  bank  can 
lend  these  funds  out  in  the  same  way.  The  practice  of 
banking  allows  the  banks  to  lend  not  all  but  a  considerable 
proportion^of  the  f^inHs.  the  practicelSeing  made  saT?  and 
feasible  "Because  the  bank  knows  that  it  will  not  be  called 
upon  by  all  of  its  customers  to  refund  the  deposits  at  any 
one  time.  Moreover,  the  bank  can  and  does  aim  to  arrange 
the  length  of  time  of  its  loans  and  the  dates  of  maturity  in 
such  a  way  that  a  steady  str^g^m  of  loq^s  will  be  maturing 
at  known  peTiods  during  the  year.  This  arrangement,  com- 
bined with  {he  assurance  thatthe  customers  will  not  come 
together  on  the  same  day  and  announce  that  one  and  all 
want  their  money  out,  makes  it  safe  for  the  bank  to  lend 
out  a  large  proportion  of  the  amounts  placed  in  its  keeping 


380  Money  and  Credit 

by  customers.  In  transactions  with  such  deposit  accounts, 
the  bank  may  or  may  not  be  obliged  to  pay  any  interest  for 
the  deposits,  but  does  on  the  other  hand  receive  the  current 
rate  of  interest  for  lending  out  the  funds.  So  whether  the 
bank  has  to  pay  a  low  interest  rate  for  the  deposits  or  re- 
ceives them  free  for  safe  keeping,  it  makes  its  profit  by 
means  of  lending  the  funds  out  again  at  as  good  an  interest 
rate  as  can  be  secured.  By  this  means,  the  bank  makes  a 
profit  while  rendering  a  real  service  to  the  customers  who 
have  placed  the  money  in  deposit  and  to  the  customers  who 
have  borrowed  from  the  funds  thus  deposited. 

However,  if  this  were  the  only  means  of  profit,  the  banks 
would  not  be  highly  profitable  institutions.  They  have  a 
further  source  of  profits  in  the  loan  deports,  because  the 
amount  which  can  be  loaned  is  well  above  the  cash_assgts 
which  the  bank  possesses.  The  bank  is  a  '^  manufactory  of 
credit"  in  that  it  creates  loans  above  and  beyond  the 
amount  of  its  actuaJ  mojiey  resources,  and  this  manufac- 
tured credit,  this  loan  deposit  currency,  brings  a  rate  of 
interest  to  the  bank,  thereby  furnishing  income  toward  the 
profits  of  the  bank.  To  quote  David  Friday,  "What  has 
happened  is  that  the  bank  has  loaned  out  to  people  who 
have  left  those  loans  with  the  bank  as  demand  deposits  a 
large  amount  of  credit  in  excess  of  its  capital  and  surplus 
and  deposits  made  by  real  savers.  .  .  .  The  unique  power 
which  the  banking  institution  has  is  this  ability  to  manu- 
facture credit,  sell  the  right  of  its  use  to  individuals,  and 
yet  be  assured  that  the  credit  shall  remain  upon  deposit 
withthe  bank  and  not  be  drawn  out  in  such  manner  as  to 
subject  the  bank  to  depletion  of  its  cash  reserves."^  More- 
over, such  deposits  as  are  not  needed  to  meet  immediate 
obligations  can  be  invested  in  securities  of_iailiiaads,  p«blic 
utilities.  Government  b^nds,  etc.,  to  draw  an  investment  in- 
come. Principally  from  these  devices,  the  banks  manage  to 
make  a  substantial  profit  in  their  enterprise.  The  national 
banks  of  the  United  States,  for  instance,  during  the  eight 
years  ending  June  30,  1916,  made  net  earnings  of  about  9 
per  cent,  on  their  combined  capital  and  surplus. 

ID.  Friday,  "Profits,  Wages  and  Prices,"  pp.  213-214. 


Money  and  Credit  381 

Forms  of  Loans 

The  methods  by  which  banks  loan  credit  assume  a  wide 
variety.  One  important  form  is  si]4gle-ng,me  pronyssory 
notes  of  individuals  or  corporations.  The  borrower  is 
granted  a  loan  because  the  bank  has  confidence  in  his  ability 
to  pay  back  the  amount  when  it  comes  due  or  in  his  char- 
acter and  integrity.  No  definite  property  is  pledged  as 
security,  but  the  business  prosperity  of  the  borrower  must 
be  clearly  assured.  This  business  prosperity  is  ascertained 
by  inquiries  in  the  business  neighborhood  about  the  state  of 
the  borrower's  business,  by  consultation  of  the  records  of 
commercial  agencies,  such  as  Dual's  and  Bradstreet's,  indi- 
cating whether  the  borrower's  credit  rating  is  sound,  by 
personal  interviews  with  the  would-be  borrower,  by  requir- 
ing the  borrower  to  make  a  detailed  financial  staiement 
shoeing  resources  and  liabilities,  and  by  making  sure  that 
the  borrower's  quick  assets  are  at  least  double  his  current 
liabilities.  The  last  criterion  is  oi  special  significance,  be- 
cause the  quick  assets  include  assets  which  could  quickly  be 
converted  into  money  for  payment  of  the  loan  when  due. 
Such  quick  assets  include  cash  on  h^nd  or  in.bajiks,  bills 
and  accounts  receivable,  merchandise  and  raw  materials 
that  are  salable.  These  assets  should  be  at  least  double  all 
current  liabilities  of  the  borrower  up  to  the  date  of  ma- 
turity of  the  loan.  The  bank  thereby  has  adequate  assur- 
ance that  the  borrower  will  have  full  ability  to  pay  when 
the  time  comes.  Honesty  and  ability  on  the  borrower's  part 
are  the  fundamental  considerations  w^hich  determine 
whether  the  bank  wnll  consider  a  loan  safe.  Funds  raised 
by  the  loan  are  used  principally  for  working  capital  pur- 
poses, such  as  the  purchase  of  raw  materials  or  of  com- 
modities to  be  used  in  production  processes  or  distribution 
processes. 

A  second  form  of  loan,  also  of  wide  importance,  is  t"^o- 
najme  paper.  This  paper  covers  indorsed  notes  and  trade 
acceptances.  Examples  might  be  found  in  the  retail  mer- 
chant who  buys  goods  from  a  wholesale  house,  and  being 
unable  to  muster  payment  for  the  goods  until  he  has  had 


382  Money  and  Credit 

time  to  retail  them  out  to  his  customers,  gives  a  promise  to 
pay  at  the  end  of  a  certain  period.  The  wholesaler,  how- 
ever, does  not  want  to  wait  for  his  money,  so  he  takes  the 
promise  to  pay  to  his  banker,  indorses  it,  and  secures  from 
the  banker  immediate  payment.  The  note  of  the  retailer 
contains  two  names,  his  own  and  the  wholesaler's,  and  this 
two-name  paper  provides  two  parties  responsible  for  the 
payment  of  the  note  when  due.  The  bank  holds  the  note 
until  it  comes  due,  thereby  granting  credit  or  what 
amounts  to  the  same  thing,  making  a  loan  which  finances 
the  trade  deal.  A  trade  acceptance  differs  from  an  in- 
dorsed note  in  that  the  acceptance  is  an  order  written  by 
the  seller  to  the  buyer  requiring  payment,  whereas  the 
indorsed  note  is  a  promise  to  pay  written  by  the  buyer  to 
the  seller.  When  the  buyer  receives  the  order  to  pay,  he 
writes  "Accepted"  across  its  face,  and  returns  it  to  the 
seller.  The  seller  then  holds  a  completed  trade  acceptance 
which  he  may  present  ^  his  bank,  and  if  the  acceptance 
meets  with  the  banker's  approval,  he  receives  payment  at 
once.  Hence  the  seller  does  not  have  to  wait  for  his  pay- 
ment ;  the  bank  does  the  waiting,  and  thereby  serves  to  loan 
the  amount  to  finance  the  transaction.  These  forms  of 
commercial  paper  arise  from  actual  commercial  transac- 
tions for  agricultural,  industrial,  or  business  purposes. 
Commercial  paper  has  been  estimated  as  comprising  some- 
thing like  one-fourth  of  all  bank  Gre4it.^  It  provides  a 
most  important'service  in  commercial  transactions  by  mak- 
ing it  possible  for  buyers  and  sellers  to  finance  their  activi- 
ties in  forms  which  supply  adequate  safety  for  bank  credit 
support. 

Other  forms  of  loans  are  distinguished  by  other  types  of 
security.  Some  loans  are  secured  b;y  mort,gas^  an  reaJ 
estate  property,  some  by  promissory  ji^tes  which  the  bor- 
rower has  in  his  possession  awaiting  pa\Tnent  by  people  in 
debt  to  him,  some  by  collateral  in  the  shape  of  stocks  land 
bonds.  If,  for  any  reason,  the  loan  made  by  the  bank  on 
such  security  is  not  paid  at  maturity,  the  bank  can  take  the 
real  estate,  or  the  collateral  notes,  stocks,  or  bonds,  and  use 

1  B.  :M.   Anderson,   "The  Value  of  Money,"  p.  512. 


Money  and  Credit  383 

the  proceeds  from  them  to  supply  payment  of  the  loan. 
Still  other  forms  of  security  for  loans  are  bills  of  lading  or 
warehouse  receipts.  These  instruments  give  title  to  actual 
goods  in  process  of  shipment,  or  in  storage,  and  the  goods 
themselves  are  the  real  security  behind  the  loans. 

Moreover,  commercial  banks  use  a  considerable  part  of 
their  funds  for  investment  purposes.  The  facts  of  the  case 
at  this  point  suggest  how  misleading  is  a  frequent  concep- 
tion of  commercial  banks,  namely,  that  the  overwhelming 
bulk  of  their  work  is  devoted  to  purely  commercial  credit. 
"Excluding  real  estate  loans,  more  than »one-half  of  bank- 
credit  represents  either  ownership  of  bonds  (with  some 
stock)  or  else  advances  on  stocks  and  bonds. "^  Commercial 
banking  is  vitally  dependent  therefore  upon  inv^tment 
loa^s,  that  is,  long-time  credit  devoted  to  the  financing  of 
the  fixed  capital  requirements  of  corporations.  Purchase 
of  stocks  and  bonds,  or  loans  to  others  who  use  the  credit 
toward  such  purchase  of  stocks  and  bonds  is  in  the  nature 
of  investment  credit.  Stock  exchange  speculation  relies  in 
a  very  large  degree  upon  funds  derived  from  banks.  How- 
ever, stocks  are  a  minor  part  of  direct  bank  investments, 
the  bulk  of  such  investment  loans  being  made  in  bonds, 
either  corporation  bonds  or  government  bonds.  Investment 
credit  prefers  bonds  over  stocks  because  of  the  more  con- 
servative character  of  bonds.^ 

A  different  classification  of  loans  shows  time  loans  and 
deigand  loans.  Time  loans  run  for  such  periods  as  thirty, 
sixty,  or  ninety  days,  or  more.  Demand  loans  may  take  the 
form  of  call  loans,  in  which  case  they  are  used  for  stock 
market  speculation ;  or  they  may  take  the  form  of  demand 
credits  in  which  it  is  understood  that  the  loan  will  be  al- 
lowed to  run  indefinitely,  provided  only  that  it  remains 
safe  in  all  respects.  The  length  of  time  loans,  and  the  dates 
of  maturity,  are  arranged  in  such  a  manner  that  a  certain 
amount  of  loans  is  maturing  all  of  the  time.  This  insures 
a  constant  stream  of  incoming  payments  for  the  bank  be- 

1  Anderson,  Ihid.,  p.  512. 

2  For  explanation  of  relative  security  of  bonds  and  stocks,  see  pp. 
209-211. 


384  Money  and  Credit 

cause  of  the  creditors  wlio  have  to  pay  off  their  debts.  By 
scattering  the  dates  of  maturity  of  time  loans  fairly  evenly 
throughout  the  year,  the  bank  has  money  coming  in  regu- 
larly. As  loans  mature,  the  payments  on  them  form  the 
basis  for  new  loans. 

Discount 

When  a  bank  collects  interest  on  the  loan  at  the  time 
when  the  loan  is  made,  the  interest  is  deducted  from  the 
amount  of  the  loan  in  advance,  and  this  deducted  interest 
is  known  as  discount.  Discount  then  differs  from  interest 
in  that  interest  is  collected  at  the  expiration  of  a  loan, 
whereas  discount  is  deduction  of  the  amount  of  the  interest 
at  the  making  of  the  loan  at  the  outset.  The  discount 
enables  the  banker  to  make  some  profit  on  the  transaction, 
and  pays  him  for  the  service  of  creating  the  loan  credit. 
The  borrower  is  willing  to  pay  the  discount  because  he 
recognizes  that  the  banker  is  rendering  him  a  real  service 
in  enabling  him  to  carry  en  his  business. 

The  Network  of  Financial  Institutions 

Commercial  banks  are  the  most  important  of  the  finan- 
cial institutions,  but  there  are  other  types  of  financial  in- 
stitutions of  vital  importance,  and  the  various  types  supple- 
ment each  other  in  a  multitude  of  ways.  In  their  entirety, 
the  financial  institutions  of  all  sorts  constitute  an  immense 
financial  network,  interdependent  and  interrelated,  and 
unify  the  financial  services  required  in  modern  specialized 
industry  operated  under  the  price  system. 

Investment  banking  institutions  play  a  very  important 
role  in  the  whole  financial  system,  their  advent  being  a 
practical  necessity  under  the  regime  of  corporate  industry. 
Investment  bankers  serve  as  middlemen  between  corpora- 
tions issuing  securities  and  investors  seeking  to  purchase 
securities.  Investment  bankers  have  thus  far  been  keenly 
jealous  of  their  reputations  for  dealing  only  in  securities 
which  are  safe  and  reliable.  They  have  shunned  specula- 
tive securities,  and  have  confined  their  services  to  the  better 
type  of  stocks  and  bonds.  Most  corporations  invite  the  aid 
of  investment  bankers  in  selling  their  securities  to  the  invest- 


Money  and  Credit  385 

ing  public,  and  most  investors  are  glad  of  the  expert  advice 
and  assistance  of  the  investment  bankers  in  directing  them 
in  placing  their  money  safely,  wisely  and  profitably. 

One  function  of  investment  banking  is  careful  analysis 
of  the  soundness  and  reliability  of  the  corporation  whose 
securities  are  seeking  the  investment  market.  This  analysis 
is  possible  only  at  the  hands  of  experts.  It  includes  a  very 
elaborate  survey  and  investigation  of  legal  factors,  such  as 
taxation  provisions,  degree  of  regulation  of  the  corporation 
by  state  or  federal  governmental  commissions,  laws  affect- 
ing the  business,  etc.;  of  engineering  factors,  such  as  pro- 
ductive equipment,  efficiency  of  management,  nature  of 
material,  etc. ;  of  financial  technique,  such  as  fair  price  to 
be  charged  for  the  securities,  rates  of  income,  dates  of 
maturity,  means  of  registration,  etc. ;  of  general  economic 
factors,  such  as  stability  of  demand  for  the  corporation's 
products  or  services,  advertising  policy  of  the  company, 
amount  of  competition,  market  conditions,  labor  policy, 
etc. ;  and  finally,  of  the  psychological  element,  such  as  the 
public  taste,  confidence  in  the  leading  men  in  the  enter- 
prise, mood  of  the  investing  public,  and  general  acquaint- 
ance with  the  line  of  business.  The  isolated  investor  has 
neither  the  technical  skill  and  intelligence  requisite  for 
such  an  investigation  and  analysis,  nor  the  money  or  the 
time  to  carry  it  out. 

The  mass  of  investors  are  thus  absolutely  dependent  upon 
the  judgment  of  the  investment  bankers.  They  are  helpless 
in  their  remoteness  from  the  true  facts  of  corporation 
finance,  and  in  their  incapacity  to  analyze  and  understand 
the  factors  which  make  an  investment  safe  and  sound.  The 
average  small  investor  buys  bonds  with  blind  confidence  in 
the  opinion  of  investment  bankers  whom  he  has  never  seen. 
This  reacts  upon  the  bankers  as  an  inducement  to  build  up 
a  reputation  for  great  sagacity  and  reliability  in  passing 
upon  stock  and  bond  issues.  The  bankers  cover  their 
chances  of  making  an  error  by  stating  that  the  information 
given  in  connection  with  a  bond  issue  is  not  guaranteed  but 
comes  from  what  they  consider  to  be  reliable  sources.  If 
the  investment  bankers  are  careless  or  selfish  or  inadequate 


386  Money  and  Credit 

there  may  happen  a  calamity  such  as  befell  the  New  York, 
New  Haven  and  Hartford  Railroad  a  few  years  back. 
Moreover,  the  chances  for  depredations  hj  occasional  dis- 
honest investment  dealers  are  not  properly  under  control 
under  present  conditions.  The  cardinal  fact  in  this  invest- 
ment situation  is  the  helplessness  of  the  average  individual 
investor,  and  his  dependence  upon  investment  bankers  for 
such  safety  as  may  exist  for  his  invested  funds.  Hence, 
the  psychological  factor  of  good  will  is  of  utmost  impor- 
tance to  the  investment  banker.  "In  this  light,"  as  A.  S, 
Dewing  points  out,  "good  will  is  perhaps  a  more  valuable 
asset  to  his  business  than  to  that  of  any  other  merchant, 
and  ordinarily  he  protects  his  reputation  at  all  hazards, 
even  though  it  involves  him  temporarily  in  heavy  losses,"^ 
In  these  services,  the  investment  bankers  serve  as  a  kind 
of  balance  wheel  between  the  optimistic  psychology  of  the 
promoters  of  corporations  and  the  credulous  psychology  of 
investors.  The  promoters  of  new  corporate  enterprises  are 
usually  characterized  by  the  tendency  to  over-emphasize 
the  bright  side  of  their  new  projects.  A  splendid  trust  in 
the  future  earning  power  of  the  new  corporation  enables 
them  to  spread  a  contagious  enthusiasm  broadcast,  and 
their  spontaneous  optimism  often  leads  them  to  excessive 
confidence  in  new  adventures.  Moreover,  the  mass  of  in- 
vestors are  all  too  easily  enthused  by  fine  hopes,  and  the 
promise  of  big  dividends  has  almost  magic  effects  in  per- 
suading many  people  to  sink  their  money  in  securities.  A 
large  part  of  the  investing  public  is  surprisingly  gullible, 
and  the  investment  banker  saves  the  investor  from  the  fate 
to  which  his  own  credulity  would  often  lead  him,  by  stand- 
ing as  a  conservative  buffer  between  the  promoter  of  the 
corporation  and  the  prospective  buyers  of  the  stock.  How 
important  this  service  of  the  investment  banker  is  appears 
from  the  fact,  as  stated  by  Dewing,  that  "it  is  probably  not 
an  exaggeration  to  state  that  upwards  of  ten  enterprises  are 
rejected  by  every  investment  banker  for  every  one  that 
is  accepted."^ 

1  A.  Dewing,  "Financial  Policy  of  Corporations,"  II,  p.  28. 

2  Ihid.,  II,  p.  30. 


Money  and  Credit  387 

After  the  investment  banker  has  decided  to  act  as  the 
merchant  to  sell  the  securities  of  a  corporation  to  investors, 
he  proceeds  to  map  out  a  selling  plan.  He  seldom  under- 
takes the  sole  responsibility  for  marketing  the  securities. 
On  the  contrary,  he  organizes  an  underwriting  syndicate  of 
bankers  to  market  the  securities  by  their  associated  efforts. 
This  group  of  bankers  takes  the  securities  from  the  corpora- 
tion at  a  certain  price  in  the  expectation  of  selling  them 
to  the  buying  public  at  a  higher  price.  If  this  expectation 
proves  well  founded,  the  sales  take  place  all  right,  if  not, 
the  syndicate  suffers  a  loss.  The  syndicate  takes  the  risk, 
in  other  words,  of  marketing  the  bonds  or  stocks.  The 
existence  of  this  risk  is  the  main  reason  for  forming  the 
syndicate.  The  group  action  serves  to  distribute  the  risk 
among  a  number  of  bankers.  No  one  investment  firm  is 
overloaded  with  financial  responsibility,  and  the  action  as 
a  group  serves  to  make  the  whole  transaction  for  the  mar- 
keting of  the  securities  surer  and  safer  for  all  parties  con- 
cerned. In  the  larger  and  more  important  transactions,  the 
number  of  underwriters  may  run  as  high  as  more  than  one 
hundred.^ 

The  profits  of  the  investment  bankers  may  be  of  two 
sorts,  commissions  on  the  sales,  or  bonuses  of  common  stock. 
The  commissions  on  sales  arise  from  the  margin  between 
the  price  paid  the  corporation  for  the  securities  and  the 
price  charged  investors.  For  instance,  if  the  bankers  buy 
securities  at  96  and  sell  at  98,  the  margin  of  two  gives  the 
banker's  commission.  At  the  same  time,  the  syndicate  may 
be  given  blocks  of  common  stock  which  represent  not  pres- 
ent tangible  property,  but  have  value  because  of  the  pros- 
pect that  the  earning  capacity  of  the  new  corporations  will 
be  great  enough  to  pay  dividends  on  the  common  stock  in 
the  near  future.  The  profits  in  some  cases  have  been  enor- 
mous. The  promotion  and  underwriting  of  the  United 
States  Steel  Corporation  Avith  its  various  .subsidiaries  re- 
sulted in  the  award  of  about  one-seventh  of  the  total  capital 
stock  of  the  Steel  Corporation  for  promoting  and  under- 

1  Brandeis,  "Other  People's  Money  and  How  the  Bankers  Use  It," 
p.  43. 


388  Money  and  Credit 

writing  services,  or  a  total  of  more  than  $150,000,000.  But 
there  have  been  frequent  losses  of  large  sums  among  under- 
writers. "Their  profits  through  successful  syndicates  are 
often  almost,  if  not  entirely  canceled  by  losses  from  unsuc- 
cessful underwritings."^  The  risks  involved,  of  course,  war- 
rant substantial  profits,  although  in  a  number  of  cases  the 
profits  have  seemed  to  be  exorbitant  and  unearned.  In 
general,  the  profession  of  investment  banking  is  looked 
upon  as  being  generously  lucrative. 

Investment  banking  involves,  besides  analysis  and  under- 
writing, the  actual  disposal  of  the  securities  to  the  buying 
public.  A  large  part  of  the  securities  are  marketed  through 
large  distributing  houses,  retail  banking  houses,  bond 
houses,  and  local  retail  merchants.  Bond  salesmanship  is 
one  of  the  highest  types  of  salesmanship  and  necessitates 
an  unusual  grade  of  personality,  ability  and  enthusiasm 
among  the  salesmen.  These  distributors  of  one  sort  and 
another  all  rely  mainly  upon  personal  solicitation  to  sell  the 
stocks  or  bonds.  There  is,  therefore,  a  very  elaborate  ma- 
chinery for  the  analysis,  underwriting  and  marketing  of 
investment  securities,  a  machinery  which  facilitates  the 
merging  of  the  funds  of  widely  scattered  investors  into  the 
hands  of  corporations  to  be  used  for  purposes  of  business 
organization  and  activity. 

The  corporation  securities  considered  thus  far  have  been 
high  grade  securities,  where  risk  is  reduced  to  a  minimum 
for  investors,  where  money  is  reasonably  safe,  where  income 
is  reasonably  sure.  But  there  is  another  class  of  corporate 
securities  quite  the  opposite  in  character,  and  very  large 
and  very  important,  where  the  risks  are  so  high  that  they 
are  properly  termed  speculative  securities.  These  specula- 
tive, or  low  grade  securities,  take  the  form  of  stocks,  vir- 
tually never  of  bonds.  Most  business,  at  the  outset,  is  faced 
with  great  hazards.  Most  corporations  have  to  prove  them- 
selves before  investment  bankers  will  back  their  securities. 
At  their  best,  with  the  most  careful  management  and  the 
most  cautious  planning,  new  corporations  are  experiments 

1  Dewing,  "Financial  Policy  of  Corporations,"  11,  pp.  125-127,  148- 
151. 


Money  and  Credit  389 

whose  chances  of  failure  are  large ;  and  at  their  worst,  they 
are  reckless  or  fraudulent  schemes  to  exploit  a  gullible 
public. 

The  downright  frauds  take  a  toll  of  hundreds  of  millions 
of  dollars  annually  from  the  innocent  public.  Patent  medi- 
cine fakes,  fictitious  schemes  sold  through  the  mails, 
swindles  advertised  in  newspapers,  Ponzi  adventures,  and 
their  like  are  very  common  and  fleece  the  credulous  public 
of  immense  sums  every  year.  Certain  ingenious  concerns 
have  compiled  lists  of  those  people  who  in  the  past  have 
snapped  most  easily  for  the  bait  of  swindlers,  and  for  a  fee 
they  provide  so-called  "sucker  lists"  to  the  leaders  of  new 
schemes  of  fraudulent  exploitation.  This  record  of  the 
individuals  of  the  country  whose  instinctive  equipment 
makes  them  practically  unable  to  say  "No !"  to  new  glitter- 
ing promises  of  immense  profit  is  a  real  asset  in  selling  the 
new  securities.  The  people  on  these  lists  are  those  who  are 
incapable  of  guiding  their  future  action  by  past  experi- 
ence; their  psychology  makes  them  easy  marks  time  and 
again  for  clever  swindlers. 

Many  low  grade  securities  are  not  frauds,  but  are  so 
highly  speculative  that  the  chances  are  strong  for  an  ulti- 
mate collapse  of  the  new  company  and  the  consequent  loss 
of  the  money  sunk  in  the  scheme.  New  oil  companies  and 
new  mining  adventures  are  typical  of  these  extremely  haz- 
ardous undertakings. 

In  an  effort  to  check  the  marketing  of  all  such  low  grade 
securities,  most  states  have  passed  laws,  commonly  called 
"blue  sky  laws."  The  laws  have  not  proved  effective  to  a 
satisfactory  degree  and  there  is  still  urgent  need  of  pro- 
tecting the  innocent  public  from  blind  credulity,  and  re- 
straining the  fraudulent  or  reckless  promoters  from  gross 
exploitation. 

Two  extremes  of  financial  securities  have  thus  far  been 
presented,  first,  the  thoroughly  high  grade ;  second,  the  dis- 
tinctly low  grade.  There  is  a  vast  body  of  intermediate 
stocks,  neither  ultra-speculative  nor  completely  conserva- 
tive, which  also  have  to  find  a  market.  This  body  of  securi- 
ties is  represented  in  the  bulk  of  preferred  stocks  offered 


390  Money  and  Credit 

for  sale  and  the  more  cautious  common  stocks.  Some  of 
these  securities  are  sold  direct  by  corporations  to  their  la- 
borers. For  example,  the  United  States  Steel  Corporation 
reports  approximately  50,000  shares  of  stock  sold  to  the 
workers  in  the  steel  plants.  Some  are  sold  direct  to  general 
investors.  A  very  large  proportion  is  sold  through  the 
stock  exchanges. 

The  stock  exchange  is  a  market-place  for  corporatio]i 
securities,  including  bonds,  preferred  stocks  and  common 
stocks.  A  large  number  of  the  bond  issues  which  are  sold 
through  bond  houses  are  also  listed  on  the  exchanges,  but 
the  actual  sales  through  the  exchanges  are  probably  not 
more  than  one-tenth  of  the  sales  through  investment 
bankers.  The  New  York  Stock  Exchange  is  a  voluntary 
association  of  not  to  exceed  1,100  members.  Membership 
has  to  be  purchased,  and  in  recent  years  the  price  given  for 
membership  has  run  as  high  as  upwards  of  $100,000.  The 
Exchange  maintains  a  "Coro.mittee  on  Stock  Lists,"  whose 
duty  it  is  to  require  evidence  from  the  corporation  apply- 
ing to  have  its  stocks  or  bonds  traded  in  on  the  floor  of  the 
Exchange,  to  prove  the  financial,  legal,  commercial,  and 
technical  status  of  the  concern.  The  Committee  is  a  safe- 
guard against  fraudulent  securities  and  over-speculative 
securities.  The  Committee  is  not  so  exhaustive  or  so  careful 
in  its  analysis  of  the  applying  corporation  as  the  investment 
bankers  are  in  selecting  the  security  issues  which  they  will 
deal  in,  but  the  Committee  does  carry  the  analysis  far 
enough  to  eliminate  the  more  dangerous  corporate  securi- 
ties from  the  privileges  of  the  Exchange.  There  is  also  the 
Consolidated  Exchange,  which  at  first  dealt  almost  entirely 
in  mining  securities,  but  which  has  broadened  its  activities, 
and  now  deals  in  a  great  many  issues  which  are  at  the  same 
time  listed  on  the  New  York  Stock  Exchange,  Finally 
there  is  the  New  York  Curb  Exchange,  until  recently  held  in 
the  open  street,  which  deals  in  a  great  many  security  issues 
which  are  too  speculative  to  win  admission  to  the  Stock 
Exchange.  It  also  provides  a  sale  for  the  securities  of  many 
small  corporations.  The  exchanges  provide  a  market-place 
for  the  securities  of  different  grades,  and  facilitate  the  buy- 


Money  and  Credit  391 

ing'  and  selling  of  investors  and  speculators  on  a  grand 
scale. 

The  memberships  of  the  Stock  Exchange  make  possible 
the  functions  of  brokers,  that  is,  of  buying  and  selling  not 
for  the  member's  own  account  only,  but  for  the  account  of 
anybody  who  has  money  to  place.  Brokers  to  deal  through 
the  various  types  of  exchanges  have  built  up  a  system 
of  large  scale  operations.  The  brokers  serve  as  agents 
for  customers,  and  work  for  a  commission.  Their  duties 
are  to  buy  when  the  customer  says  buy  and  sell  when  he 
says  sell,  meantime  supplying  him  with  much  expert  in- 
formation and  advice  on  the  value  and  probable  income  of 
the  securities  in  the  future.  The  larger  brokerage  houses 
maintain  branches  in  the  large  cities  of  the  country  and 
are  in  constant  communication  with  the  branches  by  an 
elaborate  telegraph  system. 

In  the  year  1918,  the  volume  of  transactions  on  the  New 
York  Stock  Exchange  alone  was  144,118,469  shares.  That 
number  of  shares  changed  hands  between  buyers  and 
sellers.  The  total  par  value  of  all  securities  listed  on  the 
New  York  Stock  Exchange  in  1918  was  approximately 
$40,000,000,000.1  "On  the  floor  of  the  New  York  Stock 
Exchange  we  have  dealings  in  excess  of  25  billions  for 
1909.  This  is  nearly  as  large  as  the  figure  w^e  have  as- 
signed. ...  to  total  retail  trade  of  the  country,  and  it  may 
well  exceed  the  retail  trade  in  fact."^ 

A  large  proportion  of  these  stock  and  bond  transactions 
is  conducted  by  means  of  borrowed  money  and  checks,  in 
other  words,  by  means  of  bank  credit.  The  common  form 
of  bank  credit  to  finance  speculative  deals  is  call  loans, 
that  is,  loans  which  the  banks  can  require  to  be  repaid  at  a 
day's  notice.  The  call  loan  is  used  by  the  broker  to  provide 
nine-tenths  of  the  purchase  price  of  the  stock,  the  other 
tenth  being  provided  in  cash  by  the  customer.  This  form 
of  buying  and  selling  is  known  as  trading  on  margins. 
Bank  credit  is  extended,  moreover,  in  vast  amounts,  to  cor- 
porations to  provide  them  with  capital  needs,  and  is  se- 

1  Jordan,  "Tnvcstmpnts,"  pp.  25S-250. 

2  B.  M.  Anderson,  "Value  of  Money,"  p.  250. 


392  Money  and  Credit 

cured  by  stock  and  bond  collateral.  Also,  banks  directly 
invest  in  the  neighborhood  of  20  to  30  per  cent,  of  their 
funds  in  stocks  and  bonds,  and  these  investments  constitute 
for  the  most  part  long-time  loans.  Bank  loans  for  invest- 
ment or  speculative  purposes  thus  comprise  an  astonish- 
ingly large  proportion  of  the  credit  extensions  of  commer- 
cial banks.  The  conclusion  has  been  drawn  by  Moulton 
that,  "It  is  enough  that  we  may  safely  conclude  that 
around  50  per  cent,  of  all  loans  of  national  and  state  banks 
and  trust  companies  is  devoted  to  investment  uses,  and 
that,  including  direct  investments,  in  the  neighborhood  of 
two-thirds  of  all  the  credit  extended  by  commercial  banks 
goes  for  fixed  rather  than  for  working  capital. '  '^ 

In  one  way  and  another,  the  market  facilities  for  stocks 
and  bonds  supplied  by  the  exchanges  are  of  the  greatest 
importance  in  the  organization  of  the  price  system,  and  are 
indispensable  for  a  system  of  economic  enterprise  in  which 
corporation  securities  play  a  primary  part.  The  exchanges 
make  possible  a  place  where  the  holder  of  securities  can 
virtually  always  find  an  immediate  sale  for  his  holdings. 
The  would4)e  buyer  can  find  oi^erings  of  securities  to  suit 
every  whim  or  taste,  from  the  ultra-risky  to  the  ultra-safe. 
People  having  funds  for  short  periods  available  for  use  can 
place  them  in  remunerative  securities  for  the  limited 
period.  The  constant  bidding  and  asking  of  prices  be- 
tween buyers  and  sellers  places  a  constant  valuation  upon 
the  securities  of  any  corporation,  a  valuation  which  takes 
fully  into  account  the  prospective  earning  capacity  of  the 
corporation.  In  brief,  the  services  of  stock  exchanges  may 
be  summed  up  as  follows :  First,  they  make  it  possible  for 
anybody  to  convert  his  savings  into  shares  of  property 
which  yield  income ;  second,  they  insure  that  shares  of  cor- 
porate property  shall  always  be  marketable,  that  whenever 
the  holder  wants  to  sell,  he  may  find  a  buyer;  third,  they 
provide  a  means  whereby  those  who  are  willing  to  take  the 
speculative  risks  of  industry  may  compare  their  forecasts 
of  industrial  and  commercial  values,  and  of  the  future 

'^Journal  of  Political  Economy,  Vol.  26,  p.  658.  See  also  B.  M. 
Anderson,  "Value  of  Money,"  Chapters  13  and  19. 


Money  and  Credit  393 

earning  power  of  corporations,  and  by  their  competitive 
and  composite  judgment  adjust  property  prices  to  property 
earning  power ;  they  make  possible  bank  credit  based  upon 
material  which  can  be  quickly  converted  into  money,  that 
is,  based  upon  collateral  security  in  the  form  of  stocks  and 
bonds. 

Savings  Banks 

Another  form  of  financial  institution  is  found  in  savings 
banks.  These  banks  exist  for  the  purpose  of  collecting  sav- 
ings in  small  amounts.  People  who  can  lay  aside  only  a 
few  dollars  at  a  time  find  in  savings  banks  a  place  for  the 
safe  keeping  of  their  money  and  at  the  same  time  are  able 
to  draw  a  small  rate  of  interest.  The  banks  make  profits 
by  lending  out  the  bulk  of  the  deposits  thus  made,  at 
higher  rates  of  interest.  The  loans  must  be  very  con- 
servative, and  the  type  of  loans  which  can  be  made  is 
restricted  by  law  to  the  safest  and  best.  In  1920,  the 
savings  banks  of  the  United  States  had  over  11,000,000 
depositors  with  a  total  of  deposits  of  more  than  $6,500,- 
000,000.  This  vast  fund  of, savings,  averaging  for  each 
individual  depositor  less  than  $700,  is  aggregated  by  the 
savings  banks,  and  the  lump  sums  derived  from  the  assem- 
bled mass  of  petty  accounts  are  used  to  finance  the  fixed 
and  working  capital  requirements  of  industry  to  a  huge 
total  amount.  The  function  of  the  savings  banks  for  the 
depositors  consists  of  holding  their  savings  in  safe  keeping 
at  a  small  interest  rate;  their  function* for  industry  and 
commerce  at  large  consists  in  bringing  together  a  scattered 
mass  of  individual  small  sums  into  a  total  fund  of  capital 
available  for  investment  and  commercial  credit.  The  sav- 
ings banks  pool  the  savings  of  millions  of  small  investors 
and  thus  make  their  savings  available  for  large  scale  credit 
operations  such  as  are  necessary' in  the  conduct  of  modern 
corporations. 

An  essentially  similar  function  is  performed  by  insur- 
ance houses,  although  they  are  not  commonly  thought  of 
primarily  as  savings  bank  institutions.  However,  the  pre- 
miums paid  into  the  insurance  companies  build  up  large 


394  Money  and  Credit 

funds  which,  must  not  be  allowed  to  lie  idle.  The  insurance 
companies  use  the  funds  derived  from  premium  payments 
for  investments  and  loans.  The  total  amount  of  life  insur- 
ance assets  utilized  in  this  way  in  1917  w^as  nearly  $6,000,- 
000,000.  The  money  paid  in  by  millions  of  scattered  policy 
holders  is  thus  collected  into  lump  sums,  and  converted  into 
real  estate  holdings,  mortgages,  bonds,  high  grade  stocks, 
policy  loans,  and  short-time  loans  to  business  concerns. 
Insurance  concerns  are  usually  under  careful  government 
supervision  and  are  required  to  be  highly  cautious  in  plac- 
ing loans  and  investments.  Their  responsibility  to  their 
policy  holders  is  of  the  utmost  importance,  and  their  ser- 
vices to  industry  and  commerce  generally  in  the  form  of 
credit  creations  facilitate  greatly  the  activities  of  eco- 
nomic life. 

Trust  Companies 

The  complicated  interrelations  of  modern  finance  led 
during  the  last  generation  to  the  organization  of  trust  com- 
panies. Their  functions  are  various.  One  function  is  to 
act  as  trustee  of  the  mortgp,ges  or  collateral  pledged  as 
security  when  bonds  are  issued.  This  trusteeship  requires 
an  oversight  of  the  value  of  the  properties  pledged  as  bond 
security,  and  a  responsibility  for  observing  that  the  terms 
of  the  bond  are  lived  up  to  by  the  corporations  concerned. 
This  function  therefore  serves  to  protect  the  rights  and 
interests  of  investors  who  could  not  personally  take  charge 
of  such  matters.  *  A  second  function  is  that  of  transfer 
agMit.  When  one  form  of  stock  is  substituted  in  a  cor- 
poration for  another  form,  when  one  form  is  replaced  by 
new  forms  of  securities,  the  trust  company  acts  as  agent  to 
call  in  the  old  certificates  and  pass  out  the  new  ones.  It  is 
also  transfer  agent  in  recording  the  transfer  of  stocks  and 
bonds  from  one  owner  t?)  another.  Tlie  trust  company 
stands  between  the  corporation  and  the  owners  of  its  se- 
curities, with  the  responsibility  for  an  independent  and 
reliable  record  of  all  such  transfers  of  securities.  A  third 
function  is  registration  of  seciyities  to  prevent  overissue. 
The  trust  company,  by  registering  the  total  of  all  stock 


Money  and  Credit  395 

actually  issued,  can  make  sure  that  this  total  does  not 
exceed  the  amount  authorized.  As  registrar,  the  ch^ef  ser- 
vice of  the  trust  company  is  to  prevent  the  corporation 
from  issuing  securities  above  the  maximum  authorized. 
Fourth,  in  case  of  default  of  interest  on  bonds,  or  of  insol- 
vency, or  reorganization  or  amalgamation  of  properties,  it 
becomes  important  to  have  a  reliable  agent  who  can  hold 
stocks  and  bonds  and  other  property  claims  in  trust  pend- 
ing the  readjustment  of  property.  The  trust  company  is 
the  logical  agent  for  this  service.  Finally,  trust  companies 
act  as  fiscal  agents  for  private  corporations  and  for  educa- 
tional and  social  institutions  of  many  sorts.  The  fiscal 
duties  may  be  the  supervision  of  interest  and  dividend  pay- 
ments, the  custody  of  securities,  a  careful  scrutiny  of  the 
property  and  business  of  corporations  whose  securities  are 
in  custody  for  the  purpose  of  making  sure  that  efficiency 
and  stability  are  maintained,  and  a  general  charge  of  the 
care  and  protection  of  property  interests  for  their  clients. 
These  services  are  all  indispensable  under  a  corporate 
property  regime,  and  the  trust  companies  therefore  are 
an  indispensable  institution  in  the  corporate  financial 
system. 

There  are  other  highly  important  services  of  trust  com- 
panies in  addition  to  their  services  to  corporate  industry. 
The  handling  of  estates  has  come  to  involve  so  many  tech- 
nical and  legal  problems  that  it  requires  the  constant  guid- 
ance of  experienced  and  skillful  experts.  Trust  companies 
act  as  administrators,  executors,  guardians,  trustees, 
assignees,  custodians  of  properties,  etc.  They  offer  services 
for  the  making  of  wills,  and  for  executing  them  in  due 
time.  Holders  of  property  who  do  not  wish  to  be  bothered 
with  managing  it,  or  who  do  not  feel  themselves  competent 
to  manage  it,  can  voluntarily  turn  the  property  over  to  the 
care  and  control  of  a  trust  company,  thus  receiving  all  of 
the  benefits  of  property  ownership  with  few  of  the  worries 
and  responsibilities  of  managing  it.  The  expert  guidance 
and  control  supplied  by  trust  companies  is  of  imperative 
importance  for  the  safe  and  wise  use  of  vast  amounts  of 
property.    Trust  companies  may  also  engage  in  the  prac- 


396  Money  and  Credit 

tices  of  commercial  and  investment  credit.^  In  a  wide  va- 
riety qf  ways,  they  supply  essential  functions  in  the  opera- 
tion of  the  highly  technical  economic  system  of  modern  times. 

Foreign  Investment  Banking 

The  exchanges  provide  facilities  which  are  taken  advan- 
tage of  in  the  buying  of  domestic  securities,  but  offerings  of 
foreign  securities  require  other  marketing  facilities.  Before 
the  World  War,  European  nations  were  well  advanced  in 
facilities  for  the  safe  investment  of  their  funds  in  the 
securities  of  countries  all  over  the  world.  The  foreign  in- 
vestments of  Great  Britain  alone  amounted  to  nearly  $20,- 
000,000,000  before  the  war.  European  nations  before  the 
war  held  upwards  of  $6,000,000,000  worth  of  the  securities 
of  American  corporations.  The  savings  of  Europeans  each 
year  gravitated  toward  the  corporation  stocks  and  bonds  of 
foreign  countries,  w4th  the  result  that  the  industry  and 
commerce  of  non-European  countries  were  in  a  very  con- 
siderable degree  owned  by  Europeans.  The  development 
and  economic  progress  of  outside  countries  depended  upon 
capital  funds  from  the  more  highly  developed  industrial 
countries  of  Europe.  Each  country  had  financial  institu- 
tions which  connected  investors  at  home  with  securities 
abroad  in  ways  which  were  reasonably  safe  and  profitable. 
For  example,  the  investors  of  Great  Britain  had  access  to 
British  investment  trusts  which  served  as  a  medium  and 
agent  between  home  investors  and  foreign  corporations. 
These  trusts  were  able  to  make  some  analysis  of  the  cor- 
porations seeking  a  market  for  their  securities  in  Great 
Britain,  and  were  able  to  diversify  investments  in  such 
ways  as  to  minimize  the  risks  of  foreign  investments  within 
safe  limits. 

1  In  fact,  most  trust  companies  now  have  a  large  part  of  their 
operations  in  the  form  of  straight  commercial  banking  and  of  invest- 
ment banking.  Trust  companies  may  become  members  of  the  Federal 
Reserve  System;  and  commercial  banks  which  are  members  of  the 
system,  may  by  special  permission  of  the  Federal  Reserve  Board, 
engage  in  the  special  trustee  activities  of  trust  companies.  Trust 
companies  also,  in  many  instances,  combine  with  their  commercial 
banking  activities,  the  activities  of  saving  banks.  Some  trust  com- 
panies are  such  in  name  only  and  do  almost  wholly  commercial  and 
savings  banking. 


Money  and  Credit  397 

Before  the  war,  the  United  States  bought  only  a  negli- 
gible amount  of  foreign  securities.  Her  home  savings  were 
not  enough  to  buy  all  of  the  securities  of  her  home  corpora- 
tions. American  corporations  often  relied  upon  European 
investment  bankers  and  trusts  to  float  their  securities  in 
European  market  circles.  As  stated,  American  securities 
owned  abroad  were  nearly  $6,000,000,000.  The  war  changed 
the  relationship  so  that  now  these  securities  have  largely 
returned  to  the  hands  of  American  investors,  and,  what  is 
more  impressive,  Americans  hold  upwards  of  $4,000,000,000 
of  European  securities.  In  addition  to  these  security  hold- 
ings, the  United  States  Government  has  loaned  to  the  Euro- 
pean countries  about  $11,000,000,000,  and  a  floating  in- 
debtedness to  Americans  for  unsettled  export  accounts  has 
run  up  to  over  $3,000,000,000.  This  situation  involves  an 
annual  interest  owing  the  United  States  of  about  $600,- 
000,000.  These  relations  make  of  the  United  States  a 
creditor  nation.^  The  fuller  implications  of  this  creditor 
status  will  be  gone  into  later,  but  at  this  point  it  is  im- 
portant to  understand  that  the  net  effect  upon  the  financial 
institutions  of  the  United  States  is  to  encourage  a  continued 
and  increasing  investment  of  American  funds  in  the  indus- 
trial securities  of  those  European  countries  which  are 
debtors  to  the  United  States. 

Investment  trusts  therefore  become  a  necessity  in  this 
country.  Under  the  Edge  law,  passed  by  Congress  since 
the  war,  banking  institutions  are  authorized  to  associate 
themselves  for  the  purpose  of  making  available  to  Ameri- 
can investors  securities  which  will  provide  funds  for  com- 
merce and  industry  for  foreign  countries.  Several  such 
associations  among  large  bankers  have  already  been  formed, 
and  although  the  future  of  their  activities  is  uncertain,  it 
appears  hopeful  that  the  new  investment  trusts  for  for- 
eign corporation  securities  will  have  indispensable  func- 

iSee  Annual  Report  of  United  States  Treasury,  1920,  pp.  73-92; 
Federal  Reserve  Bulletin,  Nov.,  1921;  Moulton  and  Bass,  "America, 
and  the  Balance  Sheet  of  Europe,"  pp.  19-27;  Friedman,  "Inter- 
national Finance  and  Its  Reorganization";  "Annals  of  the  American 
Academy,"  March,  1921:  B.  M.  Anderson,  Jr.,  Chase  National  Bank 
Economic  Bulletin,  Oct.  5,  1920. 


398  Money  and  Credit 

tions  in  the  placing  of  American  savings  and  in  the  financ- 
ing of  foreign  industry  and  trade.^ 

Other  Financial  Organizations 

Several  other  credit  and  money  organizations  enter  into 
the  processes  of  the  financial  system.  Commercial  paper 
houses  operate  by  selling  notes  and  bills  of  exchange  of 
business  men  to  bankers.  They  serve  as  brokers,  and  busi- 
ness men  find  it  advantageous  to  patronize  them  because 
of  rates  more  favorable  than  banker's  rates,  or  because  a 
business  firm  veants  more  credit  than  its  bank  desires  to 
handle,  or  because  a  firm  desires  to  treat  its  borrowing 
power  w4th  its  bank  as  a  reserve  for  emergency  needs. 
Discount  companies  operate  by  purchasing  accounts  receiv- 
able from  business  men,  thereby  supplying  business  men 
who  have  sold  goods  on  credit  with  immediate  money  for 
their  business  needs.  The  discount  company  waits  for  the 
accounts  to  mature,  and  thereby  serves  both  the  buyer  and 
the  seller  of  the  goods.  Such  companies,  in  turn,  borrow 
heavily  from  the  commercial  banks  to  obtain  the  funds 
which  they  supply  to  business  men,  by  discounting  their 
accounts  receivable.  A  large  part  of  the  accounts  receiv- 
able discounted  in  this  way  are  automobile  accounts.  The 
automobiles  of  the  country  are  bought,  in  the  majority  of 
cases,  on  credit.  The  automobile  corporations  are  not  them- 
selves able  to  wait  for  the  accounts  to  be  paid,  and  hence 
secure  immediate  money  by  discounting  the  promises  to  pay 
of  the  buyers  of  cars  with  discount  houses  or  automobile 
banks. 

Agricultural  credit  has  in  the  past  been  subject  fre- 
quently to  very  high  rates  of  interest.  The  credit  has  been 
secured  largely  from  country  commercial  banks,  cattle  loan 
companies,  private  individuals,  store  keepers  in  the  com- 
munity, the  manufacturers  of  farm  machinery,  and  farm 
mortgage  companies.  Since  1916,  agricultural  credit  has 
been  facilitated  by  a  Federal  Farm  Loan  System,  which 

1  Moulton,  "Financial  Organization  of  Society";  J.  M.  Keynes, 
"Economic  Consequences  of  the  Peace";  F.  A.  Vanderlip,  "What 
Happened  to  Europe";  P.  M.  Warburg,  Political  Science  Quarterly, 
JDecember,  1920.     See  also  pp.  423-426  of  this  volume. 


Money  and  Credit  399 

provides  for  Federal  encouragement  and  supervision  of 
Federal  Land  Banks,  Farm  Loan  Associations,  and  Joint 
Stock  Land  Banks, 

The  basic  principle  of  this  system  of  farm  credits  is  that 
farmers  may  borrow  money  by  giving,  as  a  security,  mort- 
gages on  land  values,  and  that  the  farm  banking  institu- 
tions may  use  this  mortgage  security  as  the  basis  of  bond 
issues  to  be  sold  to  general  investors.  The  sale  of  such  bond 
issues  supplies  the  banks  with  funds  which  can  be  used  in 
the  financing  of  further  farm  loans  based  in  turn  on  their 
proper  security  of  land  mortgages.  Thus  the  farm  banks 
obtain  a  large  part  of  their  loanable  resources  by  issuing 
bonds  based  upon  farm  mortgages  in  their  possession. 
Other  resources  are  obtained  by  the  sale  of  capital  stock  to 
private  investors  and  to  the  United  States  Government. 
Farmers  secure  their  credit  by  mortgaging  their  land  to  the 
banks  as  security  for  the  loans.  The  machinery  of  this 
farm  credit  system  consists,  first  of  all,  of  a  supervisory 
body,  known  as  the  Federal  Farm  Loan  Board.  This  board 
divides  the  country  into  twelve  districts,  and  establishes  a 
Federal  Land  Bank  in  each  district.  Each  of  these  twelve 
district  land  banks  may  in  turn  establish  branches  in  its 
own  district.  The  amount  of  loans  of  these  land  banks  in 
1920  was  about  $350,000,000.  Loans  of  these  Federal  Land 
Banks  are  made  through  Farm  Loan  Associations,  com- 
posed of  farm  owners,  who  own  shares  of  the  capital  stock 
of  the  land  bank.  Rates  of  interest  are  not  to  exceed  six 
per  cent,  and  loans  may  run  from  five  to  forty  years.  In 
1920  there  were  approximately  four  thousand  Farm  Loan 
Associations  in  operation,  principally  in  western  and  south- 
western states.  There  are  also  established,  under  supervi- 
sion of  the  Federal  Farm  Loan  Board,  what  are  known  as 
Joint  Stock  Land  Banks,  which  are  private  corporations, 
and  which  cannot  have  any  of  their  stock  owned  by  the 
United  States  Government.  These  banks  are  subject  to  the 
maximum  interest  rate  of  six  per  cent,  and  they  may,  sub- 
ject to  certain  limitations,  loan  any  amount  they  wish  and 
for  any  purpose.  In  1920,  there  were  twenty-five  active 
banks  of  this  type,  with  mortgaged  loans  amounting  to 


400  Money  and  Credit 

approximately  $79,000,000.  By  this  machinery,  long-term 
rural  credits  are  facilitated,  but  short-term  credits  are  not 
materially  aided.  Moreover,  the  loans  of  the  land  banks 
are  aimed  to  aid  persons  who  are  already  owners  of  some 
amount  of  land  more  than  to  aid  tenants  of  farms.  The 
system  needs  a  much  wider  extension  than  at  present,  but 
it  is  a  move  in  the  direction  of  supplying  farmers  with 
credit  at  reasonable  rates  of  interest  when  and  where  needed. 

In  addition  to  all  of  the  previously  mentioned  credit  in- 
stitutions, there  are  numerous  pawnbrokers  who  furnish 
credit,  usually  in  small  amounts;  there  are  so-called  loan 
sharks  who  make  loans  to  people  who  are  in  pressing  need 
of  small  sums,  at  rates  of  interest  running  as  high  as  200 
and  300  per  cent. ;  there  are  co-operative  banks  established 
by  credit  members  and  others  established  by  labor  unions, 
the  latter  being  illustrated  by  the  recent  banks  organized 
by  the  Railroad  Brotherhoods;  there  are  Morris  Plan 
Banks,  which  extend  credit  for  consumers'  needs;  and  there 
are  building  and  loan  associations  with  a  membership  of 
more  than  4,000,000  and  total  assets  of  about  $2,000,000- 
000  which  serve  to  finance  home  buying  and  to  care  for  the 
savings  of  members  and  investors. 

This  array  of  financial  institutions,  ranging  all  the  way 
from  commercial  banks  to  building  and  loan  associations, 
constitutes  a  vast  mass  of  credit  and  money  organizations,  a 
varied  and  scattered  horde  of  different  types  of  concerns, 
each  serving  special  needs  and  performing  in  its  own  par- 
ticular way  useful  and  indispensable  functions.  But  in 
their  entirety  they  are  bound  together  in  one  harmonious, 
unified,  interrelated  price  system.  The  two  striking  aspects 
of  the  whole  financial  system  are  first  the  immense  variety 
and  the  wide  range  of  different  types,  and,  second,  the 
unity  of  financial  organization  which  is  attained  out  of  the 
multiplicity  of  forms  and  types.  The  means  whereby  unity 
is  achieved  deserve  description  at  some  length. 

The  Interdependence  of  Financial  Institutions 

The  multitudinous  types  of  financial  organizations  are  all 
cogs  in  a  single  financial  wheel.  They  are  interrelated  and 
interdependent,  and  function  as  a  financial  clockwork. 


Money  and  Credit  401 

It  has  already  been  stated  that  the  commercial  banks 
hold  the  position  of  dominating  importance  in  the  financial 
structure,  and  it  is  therefore  proper  to  consider  the  ma- 
chinery by  which  the  commercial  banks  within  each  local 
community  and  between  communities  are  enabled  to  func- 
tion in  co-operation  and  harmony  with  each  other.  In  any 
city  of  considerable  size,  the  main  banks  are  organized  in 
clearing  houses.  The  principle  of  the  clearing  house  is  in 
essence  that  the  member  banks  shall  settle  the  balances  of 
debit  and  credit  among  themselves  by  a  process  of  cancella- 
tion. In  a  single  city,  the  banks  are  not  acting  each  inde- 
pendently of  all  the  others,  but  are  constantly  doing 
business  with  each  other.  If  there  are  twenty  important 
commercial  banks  in  a  given  city,  the  depositors  of  each 
bank  are  drawing  checks  on  their  accounts  and  sending  the 
checks  to  depositors  in  the  other  banks  as  a  means  of  paying 
bills  to  business  men  who  keep  their  deposits  with  those 
other  banks.  Suppose  a  business  man  who  does  his  banking 
with  bank  No.  1  is  engaged  in  business  deals  which  involve 
the  payment  of  bills  to  and  the  receiving  of  money  from 
fifty  other  men.  Suppose  the  fifty  other  men  have  banking 
done,  not  by  bank  No.  1,  but  by  the  other  nineteen  banks  in 
the  city.  Checks  are  passing  back  and  forth  through  the 
various  banks,  to  and  from  the  various  business  men,  with 
the  result  that  the  deposits  of  each  business  man  vary  from 
day  to  day.  The  check  amounts  to  an  order  to  the  business 
man's  banker  to  transfer  a  certain  amount  of  funds  to 
another  man's  banker  to  be  put  to  the  deposit  account  of 
the  second  business  man  in  that  bank.  Hundreds  of  checks 
call  for  hundreds  of  transfers  of  funds  from  bank  to  bank, 
involving  millions  of  dollars.  The  clearing  house  is  a  simple 
and  convenient  means  of  effecting  such  transfers  by  means 
of  cancelling  the  accounts  of  the  various  banks  in  the  clear- 
ing association.  Each  bank  sends  to  the  central  clearing 
house  its  checks  on  other  banks,  representing  the  amount 
owed  to  it  by  other  banks.  The  other  banks  bring  to 
the  clearing  house  the  checks  on  the  bank  first  mentioned, 
representing  the  amount  owed  hy  it  to  other  banks.     The 


402  Money  and  Credit 

totals  are  set  over  against  each  other,  and  balances  are 
ascertained.    The  balances  only  are  paid. 

The  methods  of  paying  such  balances  vary  greatly,  in- 
cluding direct  transfer  of  cash,  clearing-house  certificates 
based  upon  cash  deposits  by  each  member  bank  with  the 
clearing  house,  drafts  by  small  banks  upon  banks  in  large 
centers,  and  adjusting  banks'  balances  with  the  regional 
Federal  Reserve  Banks.  Since  the  entry  of  the  Federal 
Reserve  System  of  banking,  balances  can  be  settled  by  each 
bank's  depositing  funds  with  the  Federal  Reserve  Bank  of 
the  district  and  thereafter  ordering  the  bookkeepers  of  the 
Federal  Reserve  Bank  to  transfer  on  their  books  the  bal- 
ances involved  in  the  inter-bank  clearings.  A  system  of 
book  accounting  then  increases  or  diminishes  the  deposits 
of  each  bank  and  thereby,  without  the  handling  of  actual 
money,  even  the  balances  are  adjusted  by  merely  making 
the  proper  entries  on  the  books  of  the  Federal  Reserve 
Bank. 

A  considerable  percentage  of  the  banks  in  a  city  are  not 
members  of  the  clearing-house  association,  due  to  the  cost 
or  to  the  fact  that  they  are  not  wanted.  These  non- 
member  banks  clear  their  accounts  by  using  one  of  the 
member  banks  as  agent.  In  smaller  communities,  local 
clearings  between  banks  are  made  by  each  bank 's  sending  a 
messenger  to  the  other  banks  to  present  the  check  accounts, 
and  thereby  to  secure  a  cancellation  of  a  part  of  the  count 
and  a  payment  of  the  balance.  The  bulk  of  clearings,  how- 
ever, are  made  through  the  big  banks  organized  in  clearing 
houses.  The  largest  clearings  are  in  New  York,  where  the 
average  daily  clearance  runs  above  $300,000,000. 

The  consideration  thus  far  has  been  devoted  to  interbank 
clearings  within  a  town  or  city.  It  is  equally  important  to 
effect  clearings  between  banks  scattered  all  over  the  coun- 
try. The  Federal  Reserve  System  supplies  a  means  for 
carrying  out  these  clearings  between  the  banks  of  different 
communities.  Twelve  Federal  Reserve  Districts  are  marked 
out,  with  a  Federal  Reserve  Bank  in  each  district.  Each 
of  these  reserve  banks  acts  as  a  clearing  agent  for  the  banks 
within  its  district.    For  example,  if  a  bank  in  Buffalo  re- 


Money  and  Credit  403 

ceives  from  one  of  its  customers  a  deposit  of  cheeks,  some 
of  them  made  out  on  a  bank  in  Albany,  some  on  a  bank  in 
Rochester,  and  some  on  a  bank  in  Poughkeepsie,  the  Buffalo 
bank  may  send  the  checks  direct  to  the  Federal  Reserve 
Bank  of  that  district,  located  in  New  York  City.  The  Fed- 
eral Reserve  Bank  in  turn  makes  the  collections  from  the 
banks  in  Albany,  Rochester  and  Poughkeepsie.  At  the 
same  time,  the  three  latter  banks  may  have  sent  checks 
drawn  on  the  Buffalo  bank  to  be  collected  through  the  Fed- 
eral Reserve  Bank.  The  reserve  bank,  by  a  process  of 
book  accounting,  may  offset  the  debits  and  credits  of  the 
various  banks,  and  the  balances  may  be  adjusted  by  book 
entries  transferring  deposits  which  the  member  banks  carry 
with  the  reserve  bank.  This  system  practically  does  away 
with  the  shipment  of  specie  from  bank  to  bank,  and  effects 
clearance  between  banks  by  the  use  of  checks  and  book 
accounting. 

The  clearings  between  banks  in  the  twelve  separate  re- 
serve districts  are  effected  in  a  similar  way.  A  bank  in  one 
district  desiring  to  collect  a  check  drawn  on  a  bank  in  an- 
other district  sends  it  to  the  reserve  bank  in  its  own  district, 
which  forwards  the  check  to  the  reserve  bank  in  the  other 
district,  which  in  turn  collects  from  the  specified  bank 
within  its  jurisdiction.  Each  of  the  twelve  Federal  Re- 
serve Banks  ascertains  daily  the  total  of  all  its  credit  de- 
mands upon  the  other  reserve  banks  and  wires  the  amount 
to  the  Federal  Reserve  Board  at  Washington,  D.  C.  This 
central  organization  at  Washington  holds  a  ' '  gold  clearance 
fund,"  consisting  of  actual  deposits  of  gold  or  gold  certifi- 
cates from  the  twelve  reserve  banks.  The  central  board 
therefore  lines  itf)  the  claims  of  each  of  the  twelve  reserve 
banks  against  the  others,  and  after  arriving  at  the  balances 
due  to  or  from  each  bank,  pays  the  balance  by  making  an 
entry  on  its  books  increasing  or  diminishing  the  gold  de- 
posits of  each  bank.  This  gold  clearance  fund  is  not  ac- 
tually handled  in  each  case ;  there  is  simply  a  record  made 
on  the  books^  of  the  central  board  signifying  that  a  part  of 
the  gold  deposits  of  one  reserve  bank  is  transferred  to  the 
account  of  another.     This  system  of  clearance  involves  a 


404  Money  and  Credit 

minimum  of  money  shipments,  and  accomplishes  the  ser- 
vices of  clearance  by  the  use  of  checks  and  book  accounting.^ 
The  principle  of  clearance  of  interbank  accounts  has  the 
most  far-reaching  and  inclusive  applications  throughout  the 
banking  system.  It  unifies  the  financial  services  of  the  30,- 
000  commercial  banks  of  the  country,  and  facilitates  the 
use  of  credit  in  the  bulk  of  trade  and  industrial  transac- 
tions. It  provides  the  machinery  for  an  adequate  enforce- 
ment of  the  solid  interdependence  of  financial  institutions 
and  simplifies  the  almost  infinite  interrelations  of  tens  of 
thousands  of  banks  in  a  most  economical  and  reliable  way. 

The  Federal  Reserve  System 

Banking  in  the  United  States  is  supervised  by  what  is 
known  as  the  Federal  Reserve  System.  The  unification  and 
the  effectiveness  in  almost  every  way,  of  the  banks  of  the 
country,  are  directly  related  to  the  Federal  Reserve  System. 

The  Federal  Reserve  System  was  established  by  an  Act 
of  Congress  in  1913,  and  has  been  subject  to  a  number  of 
subsequent  modifications  and  improvements.  The  system 
provides  for  twelve  banking  districts  in  the  United  States, 
the  boundaries  of  the  various  districts  being  set  by  com- 
mercial and  industrial  reasons  rather  than  by  geographical 
ones.  Each  district  has  a  city  containing  a  Federal  Reserve 
Bank.  The  twelve  reserve  cities,  the  financial  centers  of 
their  respective  districts,  are  as  follows :  Boston,  New  York, 
Philadelphia,  Cleveland,  Richmond,  Atlanta,  Chicago,  St. 
Louis,  Minneapolis,  Kansas  City,  Dallas,  San  Francisco. 

An  impressive  feature  of  the  organization  of  the  twelve 
Federal  Reserve  Banks  is  the  extent  to  which  they  are 
owned  and  directed,  not  by  government  officials,  but  by  the 
member  banks  of  the  districts.  Each  member  bank  is  re- 
quir*ed  to  purchase  a  mimmum  amount  of  the  capital  s|ock 
of  the  reserve  bank  of  the  district.  Hence,  the  capital  stock 
of  the  Federal  Reserve  Banks  is  owned  by  the  member 
banks  of  the  respective  districts.  The  board  of  directors  of 
each  Federal  Reserve  Bank  consists  of  nine  members,  six  of 

1  See  E.  W.  Kemmerer,  "The  A  B  C  of  the  Federal  Reserve  Sys- 
tem »  Chapter  VIII. 


Money  and  Credit  405 

whom  are  chosen  by  the  member  banks,  and  three  of  whom 
are  chosen  by  the  Fede;fal  Res^ve  Boai;^  at  Washington. 
Hence  the  dominant  power  in  the  board  of  directors  of  each 
reserve  bank  is  not  with  the  three  appointees  of  the  Gov- 
ernment, but  with  the  six  representatives  selected  by  the 
member  banks.  The  central  board,  known  as  the  Federal 
Reserve  Board,  consists  of  seven  members,  including  the 
Secretary  of  the  Treasury  and  the  Comptroller  of  the  Cur- 
rency as  ex-officio  members,  and  five  men  selected  by  the 
President  of  the  United  States.  There  is  also  a  Federal 
Advisory  Council,  consisting  of  one  representative  from 
each  of  the  twelve  reserve  banks,  to  keep  in  advisory  touch 
with  the  Federal  Reserve  Board.  These  items  constitute 
the  main  framework  of  the  Federal  Reserve  System. 
Hence,  the  organization  provides  for  a  substantial  amount 
of  unification  of  control,  but  this  is  not  carried  to  the  ex- 
treme of  government  paternalism.  The  co-operative  unity 
of  the  twelve  reserve  banks  enlists  the  concerted  interest  of 
the  constituent  parts  of  the  system  as  much  as  possible. 

The  principles  and  policies  of  the  system  cannot  here  be 
presented  in  all  their  elaborate  detail,  but  the  basic  features 
can  be  given  in  a  condensed  form  which  ought  to  make  a 
clear  picture  of  the  primary  functions  and  purposes.  This 
condensed  description  will  be  given  under  the  following 
heads:  centralization,  note  issue,  deposit  currency,  re- 
serves, clearings,  panics. 

Centralization 

Prior  to  the  Federal  Reserve  System,  the  banks  of  the 
United  States,  about  30,000  in  number,  were  for  the  most 
part,  independent  concerns,  each  working  for  itself  and  by 
itself,  with  little  co-operation  or  teamwork.  The  thousands 
of  banks  were  extremely  decentralized,  their  reserves  were 
scattered  widely,  their  interrelations  were  limited,  and  each 
bank  was  largely  dependent  upon  its  own  resources,  and 
those  alone,  in  time  of  need  or  of  panic.  The  Federal  Re- 
serve System  set  up  a  machinery  which  tended  to  increase 
co-operation  between  banks,  to  bring  about  co-operation 
in  the  use  of  their  resources,  to  enable  strong  banks  to  tide 


406  Money  and  Credit 

deserving  weak  banks  over  crises,  and  to  centralize  gener- 
ally the  functions  and  powers  of  the  banking  wOi'ld. 

Note  Issue 

It  had  long  been  a  practice  for  national  banks  to  issue 
notes  secured  by  Government  bonds,  for  the  purpose  of 
providing  a  circulating  medium  to  perform  the  work  of 
money  instruments  in  the  business  world.  Bank  notes,  in 
popular  knowledge,  are  simply  five  dollar  bills,  and  bills 
of  higher  denominations,  which  pass  from  hand  to  hand 
in  everyday  buying  and  selling.  In  times  of  business 
prosperity  and  expansion  more  of  these  bank  notes  are 
needed.  More  money  is  needed  to  produce  and  market  more 
goods.  Prior  to  the  Federal  Reserve  System,  before  the 
bank  could  issue  additional  bank  notes  to  meet  the  new 
trade  needs,  it  had  to  purchase  an  equal  par  value  of  United 
States  Bonds  as  security  for  the  notes.  If  the  price  of 
bonds  on  the  market  was  high,  it  might  not  be  profitable 
for  the  bank  to  purchase  them  as  a  basis  for  the  note  issue. 
It  so  happened  that  often  when  trade  needs  called  for  new 
note  issues  the  prices  of  Government  bonds  were  high,  and 
the  result  was  that  just  when  the  trade  needs  were  most 
urgent  the  banks  might  be  most  heavily  discouraged  from 
buying  bonds  as  a  basis  for  new  note  issues.  Therefore  the 
note  issues  did  not  expand  and  contract  with  trade  needs, 
and  the  resulting  inelasticity  of  hand-to-hand  money  was  a 
most  distressing  embarrassment  for  the  commercial  and 
industrial  life  of  the  country. 

The  Federal  Reserve  System  did  not  abolish  the  old  na- 
tional bank  notes  which  remained  in  existence  in  1913,  nor 
did  it  forbid  further  issues  of  them,  but  it  provided  means 
making  possible  their  gradual  elimination  from  the  mone- 
tary supply  if  the  banks  desire  such  an  elimination.  A  new 
bank  note  currency  of  two  sorts  was  created, — Federal  Re- 
serve Bank  Notes  and  Federal  Reserve  Notes.  The  former 
were  in  most  essential  respects  similar  to  the  old  national 
bank  notes,  being  secured  by  purchases  of  Government 
bonds  or  short-time  obligations  of  the  United  States  Gov- 
ernment.    Provision  is  made  whereby  the  new  bank  notes 


Money  and  Credit  407 

can  be  gradually  substituted  for  the  old  national  bank  notes. 
Early  in  1920,  the  old  national  bank  notes  still  outstanding 
amounted  to  about  $725,000,000.  In  the  seven  years  of  the 
Federal  Reserve's  operation,  only  about  $32,000,000  of  the 
old  bank  notes  had  been  retired, — a  condition  which  would 
indicate  that  the  old  bank  notes  are  likely  to  remain  in 
circulation  for  some  time  to  come.  The  total  volume  of  the 
new  Federal  Reserve  Bank  notes  on  January  18,  1922,  was 
$84,878,000.  Hence  the  combined  total  of  old  and  new  bank 
notes  outstanding  was  approximately  $800,000,000. 

If  the  Federal  Reserve  System  had  provided  no  other 
form  of  note  issue  than  this,  it  would  not  have  solved  the 
problem  of  elasticity  of  circulating  currency  to  fit  the  trade 
needs  of  the  country.  The  system  did  provide  a  further 
form,  known  as  Federal  Reserve  notes,  and  these  notes  are 
directly  calculated  to  supply  the  needed  element  of  elas- 
ticity in  the  currency  sj'stem.  The  Federal  Reserve  notes 
are  issued  against  commercial  credit  instruments  primarily, 
but  are  possible  also  against  gold  and  gold  certificates. 
Commercial  credit  instruments  are  the  fundamental  reli- 
ance for  assets  to  back  up  the  notes.  Such  commercial 
credit  instruments  include  promissory  notes  or  bills  of 
exchange  or  bankers'  acceptances  which  represent  strictly 
commercial,  industrial,  or  agricultural  transactions,  but 
exclude  credit  instruments  to  be  used  for  speculative  pur- 
poses. Assets  for  these  notes  also  include  credit  instruments 
created  for  the  purpose  of  trading  in  the  securities  of  the 
United  States  Government,  a  provision  widely  utilized 
in  floating  the  war  loans. 

The  method  of  putting  out  these  notes  is,  in  its  main 
essentials,  as  follows:  Any  member  bank  which  finds  that 
some  of  its  customers  desire  actual  paper  money  when  they 
borrow  from  the  bank  instead  of  a  deposit  loan  upon  which 
to  draw  checks,  will  send  some  promissory  notes,  or  bills  of 
exchange,  or  banker's  acceptances  to  the  Federal  Reserve 
Bank  of  its  district.  This  reserve  bank  will  rediscount  the 
credit  instruments  thus  received, — that  is,  will  pay  the 
member  bank  the  amount  of  the  credit  paper  less  a  rate  of 
interest  deducted  in  advance.    The  form  of  payment  will 


408  Money  and  Credit 

be  Federal  Reserve  notes.  These  notes  are  simply  the 
paper  bills  which  everybody  freely  uses  in  everyday  pur- 
chases, and  the  member  bank  can  pass  them  out  at  the 
cashier's  window  in  making  change,  or  in  cashing  checks. 
It  can  lend  them  out  to  borrowers  from  the  bank,  drawing 
on  them  the  prevailing  rate  of  interest.  A  loan  of  this  sort 
differs  from  a  deposit  loan  in  that  the  borrower  takes  away 
with  him  a  roll  of  paper  bills  instead  of  a  mere  entry  on 
the  bank 's  books  entitling  him  to  write  checks  to  the  amount 
of  the  loan.  The  bank  makes  a  profit  because  it  secures 
interest  on  the  paper  bill  money  supply.  The  circulating 
currency  of  the  community  is  increased,  and  hence  the 
expanded  trade  needs  of  the  community 'are  taken  care  of. 
The  commercial  paper  which  the  Federal  Reserve  Bank 
discounted  has  to  be  deposited  with  a  Federal  Reserve 
agent  who  has  in  his  keeping  a  supply  of  paper  notes  ready 
to  turn  over  to  the  reserve  bank  when  the  proper  commer- 
cial paper  is  presented  to  him.  This  Federal  Reserve  agent 
represents  the  United  States  Government,  since  he  is  one 
of  the  men  on  the  board  of  directors  of  the  reserve  bank 
who  is  appointed  by  the  Federal  Reserve  Board  in  Wa,sh- 
ingtou.  He  is  directly  a  Government  agent.  A  further 
requirement  must  meantime  have  been  met  by  the  Federal 
Reserve  Bank,  namely,  it  must  keep  a  gold  reserve  of  not 
less  than  40  per  cent,  as  a  security  behind  the  notes.  The 
total  outstanding  notes  on  December  23,  1920,  were  $3,404,- 
931,000  and  on  January  25,  1922,  $2,184,001,000.  The  pro- 
cess of  this  note  issue  from  beginning  to  end  can  be  sum- 
marized as  follows :  First,  an  actual  commercial,  industrial, 
or  agricultural  transaction,  or  purchase  of  Government  se- 
curities; second,  a  credit  instrument,  such  as  a  promissory 
note,  bill  of  exchange,  or  banker's  acceptance;  third,  the 
credit  instrument  from  the  local  bank  rediscounted  through 
the  Federal  Reserve  Bank  of  its  district ;  fourth,  the  credit 
instrument  deposited  with  a  Federal  Reserve  agent  as  the 
basis  of  note  issues  and  simultaneously  a  pledge  by  the 
Federal  Reserve  Bank  of  a  gold  reserve  equal  to  40  per 
cent,  of  the  note  issue;  fifth,  the  notes  turned  over  by  the 
agent  to  the  reserve  bank  and  by  it  passed  on  to  the  member 


Money  and  Credit  409 

bank  where  the  credit  instrument  originated;  finally,  the 
notes  passed  out  by  the  local  member  bank  to  its  customers 
in  the  loans  and  other  financial  relations  of  that  bank,  so 
that  the  notes  finally  become  actual  circulating  medium. 
The  whole  process  provides  an  elastic  note  issue  because 
the  starting  point  of  the  increased  note  supply  is  increased 
commercial,  agricultural,  and  industrial  activity  with  its 
accompanying  commercial  paper,  and  the  finishing  point  is 
more  paper  money  in  circulation  to  take  care  of  more  busi- 
ness activity. 

In  actual  banking  practise,  it  is  very  common  to  deviate 
from  the  course  which  has  just  been  outlined.  Banks  get 
the  notes  first  and  borrow  afterward.  The  notes  are  charged 
against  their  accounts  and  sent  to  them  at  their  request, 
and  it  is  only  when  their  reserve  balance  is  going  to  average 
below  the  required  amount  during  the  period,  that  they 
borrow  to  replenish  the  account,  which  may  have  been 
drawn  down  by  payment  of  checks  against  the  bank,  or 
through  the  clearing  house,  or  by  demands  for  currency. 

When  business  activity  decreases,  the  note  issue  tends  to 
be  retired  in  proportionate  amounts.  The  member  bank 
receives  the  paper  notes  back  from  its  customers  in  the 
daily  round  of  duties.  The  paper  money  is  used  to  pay 
wages,  to  meet  bills  at  the  grocery  store  and  the  dry  goods 
store,  to  pay  for  farm  machinery,  to  settle  personal  ac- 
counts and  in  a  wide  variety  of  daily  business  dealings. 
The  various  parties  concerned  put  their  money  on  hand  on 
deposit  with  their  bank,  in  other  words,  the  paper  notes 
float  back  to  the  bank  which  holds  their  accounts.  The 
local  bank  can  use  the  paper  notes  then  in  meeting  its  pay- 
ments to  the  Federal  Reserve  Bank,  and  the  Federal  Re- 
serve Bank  can  retire  the  notes  as  they  come  in.  It  is  to 
the  interest  of  the  local  bank  to  return  the  notes  to  its 
Federal  Reserve  Bank  because  the  local  bank  is  forbidden 
to  count  such  notes  as  legal  reserve.  If  the  paper  notes 
go  to  other  banks  than  the  one  which  first  passed  them 
out,  the  other  banks  find  it  to  their  interest  for  the  same 
reason  to  use  them  in  payment  of  their  obligations  to  their 
Federal  Reserve  Bank.    This  contraction  of  note  issues  is 


410  Money  and  Credit 

described  in  a  report  on  Federal  Reserve  Notes  and  Cur- 
rency Expansion  made  by  the  Governor  of  the  Federal 
Reserve  Board  in  1919.  The  report  states  that  the  Federal 
Reserve  notes  "are  issued  only  as  a  need  for  them  de- 
velops, and  as  they  become  redundant  in  any  locality  they 
are  returned  to  the  Treasury  at  Washington,  or  to  a  Fed- 
eral Reserve  Bank  for  redemption.  Thus  there  cannot 
at  any  time  be  more  Federal  Reserve  notes  in  circulation 
than  the  needs  of  the  country  at  the  present  level  of  prices 
require,  and  as  the  need  abates  the  volume  of  notes  out- 
standing will  be  correspondingly  reduced  through  re- 
demption." 

It  will  be  remembered  that  gold  and  gold  certificates  may 
also  serve  as  the  basis  for  such  note  issues.  If  banks  had 
gold,  it  was  policy  during  the  war  especially,  to  encourage 
member  banks  to  meet  their  obligations  to  reserve  banks 
in  gold.  Hence  gold  and  gold  certificates  have  been  con- 
centrated in  tlie  vaults  of  the  reserve  banks,  where  they 
serve  as  the  basis  for  note  issues  up  to  the  value  of  the 
gold.  The  credit  expansion  of  war  times  to  meet  the  needs 
of  increased  trade  and  production  was  thereby  made  pos- 
sible, because  the  gold  concentrated  in  the  reserve  banks 
stood  as  the  basis  for  continued  notes  outstanding.  Most 
of  the  gold  and  gold  certificates  gravitated  into  the  reserve 
vaults  of  the  reserve  banks  and  have  been  almost  entirely 
withdrawn  from  active  circulation.  As  stated  in  the  Fed- 
eral Reserve  Bulletin  of  August  1,  1919,  "Federal  Reserve 
notes  have  practically  displaced  gold  certificates  in  circu- 
lation, the  latter  being  drawn  into  the  banks  and  used  as 
reserves,  while  a  corresponding  amount  of  reserve  notes 
have  been  issued  to  take  their  place  as  media  of  exchange." 

In  popular  usage,  the  various  forms  of  bank  note  issues 
are  considered  as  money.  The  various  forms  of  money  in 
existence  in  the  United  States  would,  then,  be  gold,  silver 
and  other  metallic  money;  Government  paper  money,  such 
as  gold  or  silver  certificates ;  Treasury  notes ;  United  States 
notes;  National  Bank  notes;  Federal  Reserve  Bank  notes; 
and  Federal  Reserve  notes.  The  grand  total  of  all  these 
forms  of  money  in  the  United  States  in  1920  was  approxi- 


Money  and  Credit  411 

mately  $8,000,000,000.  This  sum  is  the  general  stock  of 
money  in  the  United  States.  But  not  all  of  this  is  in  cir- 
culation. Something  like  one-third  of  the  amount  is  held 
in  the  United  States  Treasury  and  in  the  banks  as  assets  and 
reserves;  the  remaining  proportion,  roughly  estimated  at 
two-thirds,  is  in  actual  circulation.  This  circulating  money 
passes  from  hand  to  hand  many  times  during  the  year. 
The  rate  of  turnover  of  the  money  supply  is  not  constant 
from  year  to  year,  but  studies  by  Irving  Fisher  and  others 
indicate  a  rate  of  turnover  ranging  near  to  twenty.  In 
other  words,  the  average  dollar  changes  hands  in  the  course 
of  a  year  about  twenty  times.^ 

Deposit  Currency 

It  is  apparent  that  money  provides  a  medium  of  ex- 
change for  an  enormous  volume  of  trade.  Taken  by  itself, 
the  volume  is  enormous,  and  yet,  in  relation  to  the  total 
volume  of  trade  of  the  country,  it  is  small.  The  estimates 
made  by  Fisher  indicate  tliat  the  total  volume  of  trade  is 
from  twenty  to  thirty  times  as  great  as  the  fraction  which 
is  conducted  by  the  use  of  money  as  a  medium  of  exchange. 
What,  then,  is  the  medium  of  exchange  for  this  huge  bal- 
ance of  trade?  The  answer  is,  deposit  currency."  The 
deposit  loans  and  accompanying  checks  supply  the  medium 
of  exchange  for  the  overwhelming  preponderance  of  business 
deals.  Consequently,  important  as  an  adequate  supply  of 
money  may  be  in  all  economic  life,  there  is  a  vastly  greater 
use  made  of  deposit  currency  as  a  medium  of  exchange. 

Prior  to  the  Federal  Reserve  System,  the  banks  were 
unable  to  adapt  deposit  currency  to  trade  needs.  Their 
organization  was  so  decentralized,  their  reserves  were  so 
scattered,  and  their  individualistic  power  was  so  accentu- 
ated that  deposit  currency  was  often  lacking  to  meet  trade 

1  Kemmerer,  "A  B  C  of  Federal  Reserve  System, "  p.  57;  Fisher, 
"Purchasing  Power  of  Money,"  p.  290;  Anderson.  "Value  of  Money," 
Chapters   12  and  19;    I.  Fisher,  American  Economic  Review,  7:934. 

2  See  I.  Fisher,  Am,erican  Economio  Review,  7:  935.  It  should  be 
noted  that  the  rate  of  turnover  of  deposit  currency  is  two  to  three 
times,  as  great  as  for  money;  e.g.,  Fisher  estimates  for  191fi  that 
money  changed  hands  about  24  times  in  the  year,  and  deposit  cur- 
rency 60.2  times. 


412  Money  and  Credit 

needs  in  time  of  prosperity.  No  unified  control  existed  to 
check  extremes  of  speculation,  and  no  adequate  concerted 
policy  prevailed  in  time  of  financial  crisis  to  tide  weak 
companies  over  periods  of  danger.  The  deposit  currency 
was  deficient  in  elasticity,  with  the  result  that  farmers 
and  business  men  suffered  from  sharp  swings  of  the  in- 
terest rate,  and  from  inability  to  secure  loans  when  they 
were  most  needed,  and  banks  suffered  from  the  extreme 
risks  of  their  individualistic  attempts  to  shoulder  the  re- 
sponsibilities of  large  loan  deposits  in  times  of  emergency. 
The  Federal  Reserve  System  has  changed  the  face  of  things 
in  a  very  substantial  way.  The  key  to  elasticity  under  the 
Federal  Reserve  System  lies,  first  of  all,  in  the  method  of 
centralizing  and  mobilizing  reserves.^ 

Reserves 

Under  the  old  banking  system,  banks  in  large  cities  had 
to  carry  a  money  reserve  of  25  per  cent.,  banks  in  medium- 
sized  cities  a  reserve  of  25  per  cent.,  and  banks  in  country 
towns  a  reserve  of  15  per  cent.  Under  the  Federal  Re- 
serve System,  the  reserve  requirements  for  each  class  of 
banks  is  reduced  to  13,  10,  and  7  per  cent,  respectively 
against  demand  deposits,  and  to  3  per  cent,  for  all  classes 
alike  against  time  deposits. 

Moreover,  the  Federal  Reserve  System  provides  that  the 
full  legal  reserve  of  each  member  bank  shall  be  kept  in  the 
Federal  Reserve  Bank  of  its  district.  This  new  reserve 
requirement  has  therefore  greatly  increased  the  loaning 
power  of  the  banks.  Their  capacity  to  carry  loan  deposits 
increased  immensely  when  the  minimum  reserve  require- 
ments were  cut  by  the  new  law.  Each  Federal  Reserve 
Bank  is  required  to  hold  a  minimum  reserve  of  35  per  cent, 
against  all  of  its  deposits.  This  reserve  requirement  should 
be  clearly  distinguished  from  the  reserve  requirements  of 
the  member  banks.  The  reserve  requirements  of  the  twelve 
reserve  banks  and  of  member  banks  are  two  distinct  and 
separate  things. 

These  reserve  ratios  in  reserve  banks  and  in  member 

iKemmerer,  "A  B  C  of  Federal  Reserve  System."  pp.  17-18,  64-65. 


Money  and  Credit  413 

banks  combine  in  such  a  way  as  to  make  the  total  reserves 
necessary  for  the  banking  system  as  a  whole  less  than  these 
ratios,  taken  by  themselves,  would  indicate.  For  instance, 
in  the  case  of  banks  of  the  large  cities  whose  reserve  re- 
quirement is  13  per  cent,  against  demand  deposits  and  3 
per  cent,  against  time  deposits,  the  Federal  Reserve  Banks 
holding  these  reserves  are  required  legally  to  hold  only  35 
per  cent,  against  deposits  of  bankers'  reserve  balances. 
Thirty-five  per  cent,  of  13  per  cent,  is  4.55  per  cent,  legal 
cash  reserve.  By  the  same  calculation,  the  reserves  kept  by 
Federal  Reserve  Banks  for  the  banks  of  middle-class  cities 
against  demand  deposits  is  35  per  cent,  of  the  10  per  cent, 
requirement,  and  for  country  banks  35  per  cent,  of  the  7 
per  cent,  requirement.  Hence  for  the  banking  system  as  a 
whole,  the  reserves  necessary  amount  to  only  three  to  five 
per  cent,  of  total  deposits.  As  a  matter  of  safety,  this  pos- 
sible limit  is  not  actually  reached.  A  margin  above  the 
extreme  possible  minimum  is  adhered  to  as  a  margin  of 
safety.^ 

With  this  arrangement  of  reserves,  the  member  banks 
are  in  a  position  not  merely  to  expand  their  loans  more 
than  ever  before,  but  to  make  their  loans  elastic  enough  to 
accommodate  trade  needs  under  virtually  all  normal  con- 
ditions. If  the  commercial  bank  in  any  community  is  faced 
with  a  high  demand  for  loans,  and  finds  that  with  its  pres- 
ent resources  its  limit  of  loans  has  been  reached,  it  has 
ready  at  hand  a  means  of  solving  the  problem.  One  re- 
course is  to  borrow  funds  from  the  Federal  Reserve  Bank 
of  the  district,  giving  collateral  security.  The  reserve  bank 
extends  the  loan  for  a  short  period,  not  to  exceed  fifteen 
days,  and  the  only  permissible  collateral  is  such  notes, 
drafts,  bills  of  exchange,  or  banker's  acceptances  as  are 
eligible  for  rediscount  or  for  purchase  by  Federal  Reserve 
Banks,  and  bonds  or  notes  of  the  United  States  Govern- 
ment. 

Another  recourse  is  to  rediscount  commercial  paper  with 

1  See  Moulton,  "Financial  Organization  of  Society,"  p.  483;  7\pm- 
merer,  American  Economic  Review,  Jime_  1018,  Vol.  8.  pp.  2G0-261; 
H.  L.  Reed,  American  Economic  Revieio,  June,  1918,  Vol.  8,  pp.  270- 
282;  Kemmerer,  "High  Prices  and  Deflation,"  pp.  14-30. 


414  Money  and  Credit 

the  Federal  Reserve  Bank  of  the  district.  By  this  recourse, 
the  commercial  bank  which  wishes  to  secure  increased  loan- 
ing power  sends  some  commercial  paper  from  its  files,  such 
as  promissory  notes,  bills  of  exchange,  acceptances,  etc.,  to 
the  reserve  bank,  where  the  paper  is  discounted,  and  the 
amount  remaining  after  the  discount  is  deducted  becomes  a 
deposit  in  the  reserve  bank  to  the  account  of  the  member 
bank.  If  the  member  bank  were  now  able  to  make  loans 
only  up  to  the  amount  of  this  new  deposit,  its  loaning  power 
would  be  increased,  but  not  to  any  large  degree.  What 
happens  is  that  the  new  deposit  which  exists  with  the  re- 
serve bank  is  counted  as  so  much  new  reserve  for  new  loans. 
The  new  reserve  will  serve  as  the  basis  of  loans,  if  the  bank 
is  in  the  middle  class  of  cities,  to  ten  times  the  sum  of  the 
reserve.  The  new  reserve  is  counted  as  a  basis  for  new 
loans  just  as  fully  as  though  it  were  a  new  deposit  of  gold 
with  the  reserve  bank.  The  reserve  banks  always  stand 
ready  to  rediscount  suitable  commercial  paper  for  member 
banks.  The  recourse  is  always  open  to  the  member  bank. 
In  time  of  emergency,  it  can  always  turn  to  the  reserve 
bank,  rediscount  some  of  its  commercial  paper,  and  use  the 
deposit  of  commercial  paper  as  a  reserve  for  loans  to  its 
customers  several  times  that  amount.  The  power  to  expand 
loans  to  meet  trade  needs  is  consequently  elastic. 

Although  this  practice  is  available  as  an  emergency  re- 
course, ordinarily  only  a  small  part  of  such  borrowings  by 
member  banks  actually  are  used  to  increase  the  amount  of 
their  reserve  balances.  As  the  borrowing  device  has  worked 
out  in  actual  practise,  such  borrowings  are  in  very  large 
measure  taken  in  the  form  of  Federal  Reserve  note  issues. 

But,  it  may  well  be  asked,  is  there  no  limit  to  the  loans 
which  the  reserve  banks  can  make  in  this  way  ?  If  all  com- 
mercial banks  in  a  particular  district  come  to  the  reserve 
bank  at  one  and  the  same  time  and  ask  for  collateral  loans 
or  rediscount  loans,  will  not  the  Reserve  Bank  find  its  own 
lending  power  overdrawn?  In  that  event,  and  the  event 
lias  often  occurred,  the  reserve  bank  has  an  immediate  and 
sure  recourse  in  the  system  of  mobilizing  reserves.  As  has 
been  before  stated,  the  reserve  banks  are  required  to  keep  a 


Money  and  Credit  415 

cash  reserve  of  35  per  cent,  against  deposits.  If  any  one 
reserve  bank  finds  that  its  loans  to  member  banks  are  be- 
coming so  great  as  to  exceed  that  ratio,  it  can  turn  to  the 
Federal  Reserve  Board  at  Washington,  and  through  it  bor- 
row additional  reserves  from  some  of  the  other  reserve 
banks  of  the  country.  Some  of  the  other  reserve  banks  of 
the  twelve  will  have  an  excess  of  reserves,  and  will  be  called 
upon  to  lend  from  their  surplus  of  reserves.  This  possi- 
bility of  one  reserve  bank's  being  carried  over  a  period  of 
heavy  loans  by  a  temporary  grant  of  reserves  from  another 
reserve  bank  which  at  the  time  is  in  a  period  of  light  loans 
enables  all  of  the  reserve  banks  to  co-operate  to  a  most 
beneficial  degree.  This  mobilization  of  reserves  between 
districts  makes  possible  the  fullest  possible  utilization  of 
the  total  reserves  of  the  banking  system,  and  enables  the 
banks  in  each  district  to  carry  on  their  operations  with  the 
assurance  that  they  are  not  dependent  upon  their  own  indi- 
vidual resources,  but  have  back  of  them  the  combined  bank- 
ing resources  of  the  nation. 

In  case  all  the  reserve  banks  should  find  their  loans  be- 
coming excessive  for  their  reserves,  the  law  provides  that 
temporarily  the  35  per  cent,  minimum  requirement  may  be 
waived.  However,  before  this  extreme  stage  would  be 
likely  to  arrive,  the  reserve  banks  would  be  able  to  put  a 
check  on  further  loans  by  raising  the  discount  or  interest 
rate.  This  increase  of  money  rates  would  make  borrowing 
so  expensive  for  the  customers  of  the  banks  that  they  would 
be  discouraged  from  making  any  further  additional  loans 
than  might  be  absolutely  necessary.  The  provisions  of  the 
law  thus  equip  the  reserve  banks  to  restrain  the  speculative 
and  business  loans  of  the  country  after  a  danger  point  has 
been  approached. 

Clearance  and  Other  Functions 

The  process  of  clearance  and  collection  of  checks  has  al- 
ready been  described,  and  it  should  be  clearer  now,  with  a 
more  detailed  picture  of  the  various  phases  of  the  Federal 
Reserve  System  in  mind.  The  reserve  banks,  moreover,  are 
not  confined  to  dealings  with  member  banks.     They  may 


416  Money  arid  Credit 

buy  in  the  open  market  eligible  bills  of  exchange,  bankers' 
acceptances  and  government  securities.  Also,  reserve  banks 
are  more  and  more  to  become  the  places  of  deposit  for 
funds  of  the  United  States  Treasury  Department. 

Out  of  the  whole  machinery  of  the  Federal  Reserve  Sys- 
tem, no  part  arises  of  more  dominating  importance  than 
the  elasticity  of  deposit  currency.  Not  only  can  deposits 
be  expanded  to  meet  unusual  trade  needs,  but  after  the 
trade  needs  have  been  met  the  loans  become  paid  up,  and  a 
due  contraction  of  the  deposit  currency  takes  place.  Elas- 
ticity involves  both  expansion  and  contraction,  and  the  two 
ideals  are  achieved  in  a  way  which  is  an  incalculable  ad- 
vance over  banking  methods  before  1913.  The  Federal 
Reserve  System  enables  the  banks  of  the  country  to  perform 
the  functions  and  services  which  economic  activities  de- 
mand, and  the  law  which  established  the  system  is  one  of 
the  most  constructive  pieces  of  financial  statesmanship  that 
have  ever  been  placed  on  American  statute  books. 

International  Banking  and  Credit 

International  commerce  has  come  to  be  of  fundamental 
importance  to  the  economic  prosperity  of  nations,  and  in- 
ternational banking  has  developed  credit  facilities  for  the 
making  of  international  payments.  The  estimate  has  been 
made  that  "the  manufacturing  capacity  of  the  country  has 
reached  a  point  about  20  per  cent,  in  excess  of  domestic 
requirements,  and  on  the  finding  of  profitable  markets  for 
this  surplus  production  depend  not  only  the  particular  in- 
dustries involved,  but  the  general  business  condition  of  the 
entire  country."^  Prior  to  the  World  "War,  the  financing 
of  America's  foreign  trade  was  largely  dependent  upon 
European  bankers,  but  with  the  colossal  financial  shake-up 
which  the  war  brought,  American  traders  have  been  put  in 
a  position  which  requires  that  American  bankers  provide 
the  financial  machinery  for  the  trade  of  their  own  country. 
A  transition  from  domestic  banking  to  international  bank- 
ing by  American  banks  has  been  one  of  the  notable  conse- 
quences of  the  war  and  post-war  periods. 

1  G.  E.  Roberts,  Economic  World,  April  16,  1921. 


Money  and  Credit  417 

The  Principles  of  Foreign  Exchange 

Under  the  normal  peace  time  conditions  of  trade  before 
the  war,  the  trade  between  the  Great  Powers  was  financed 
upon  the  basis  of  the  existence  of  the  gold  standard  of 
money  and  credit.  The  currency  in  circulation  in  the  eco- 
nomic systems  of  the  Great  Powers  reflected  the  stable  con- 
fidence of  the  economic  community  that  forms  of  money 
and  credit  were  convertible  into  gold.  That  confidence  was 
wrecked  by  the  large  issues  of  paper  money,  inconvertible 
into  gold,  in  the  European  countries,  and  by  the  large 
shipments  of  European  gold  to  America  in  settlement  of 
Europe's  new  accounts  as  the  debtor  of  America.  The 
point  should  be  clear,  however,  that  the  principles  of  for- 
eign exchange  commonly  assume  that  the  gold  standard  is 
in  operation,  and  that  other  forms  of  money  are  convertible 
into  that  metal. 

The  exchange  mechanism  centers  around  the  payment 
for  exports  and  imports  between  countries  by  offsetting  the 
bank  deposits  of  one  country  against  the  bank  deposits  of 
another,  and  settling  only  the  balances  by  shipments  of 
gold.  The  balances  which  cannot  be  offset  and  cancelled 
are,  in  proportion  to  the  total  amount  of  the  accounts,  com- 
paratively small,  and  hence  the  actual  shipments  of  gold 
between  countries  in  normal  times  are  likewise  compara- 
tively small. 

The  bank  deposits  which  are  cancelled  internationally  in 
this  fashion  are  primarily  in  the  nature  of  bills  of  ex- 
change. To  put  the  process  clearly,  a  very  simple  illustra- 
tion may  be  assumed.  Two  Americans  and  two  Englishmen 
are  engaged  in  international  trade.  One  American  buys 
$1,000,000  worth  of  goods  from  one  of  the  Englishmen;  the 
other  American  sells  $1,000,000  worth  of  goods  to  the  other 
Englishman.  Then  one  American  owes  $1,000,000  abroad, 
the  other  American  is  owed  $1,000,000  from  abroad.  Each 
account  is  carried  in  the  form  of  a  bill  of  exchange.  That 
is,  each  seller  writes  an  order  to  the  buyer,  or  on  the  buyer's 
bank,  if  arrangement  has  been  made  by  the  buyer  to  pay 
the  amount  to  the  seller.    These  bills  of  exchange  are  the 


418  Money  and  Credit 

paper  evidences  that  within  a  certain  period  the  stated 
sums  of  money  will  be  paid  by  the  buyers  of  the  goods. 
Who  is  to  wait  for  the  payment  to  be  made?  Must  the 
seller  wait  one,  two,  or  three  months  ?  The  fact  of  the  case 
is  that  the  seller  can  have  his  bank  wait  until  the  date  of 
payment,  and  can  himself  obtain  from  his  bank  immediate 
money  if  he  so  desires.  Suppose  the  two  bills  of  exchange 
for  $1,000,000  each  come  to  the  same  bank.  One  represents 
money  owing  by  Americans  to  foreign  concerns,  the  other 
money  owing  to  America  by  foreign  concerns.  The  Ameri- 
can bank  can  then  collect  $1,000,000  from  one  American 
trader,  and  pay  $1,000,000  to  the  other  American  trader. 
Meantime,  an  English  bank  can  do  the  same  nvith  the  Eng- 
lish side  of  the  transaction.  No  gold  will  need  to  be 
shipped.  The  bills  of  exchange  can  be  cancelled  against 
each  other  by  the  banks  of  the  two  countries,  and  by  the 
system  of  credit  instruments  the  international  transactions 
are  completed  without  the  passing  of  gold  back  and  forth. 

The  illustration,  of  course,  oversimplifies  the  matter., 
There  are  hundreds  of  importers  and  exporters  in  both 
countries,  and  they  are  yearly  drawing  thousands  of  bills 
of  exchange  on  each  other.  These  bills  of  exchange  pass 
into  the  hands  of  the  banks  and  are  bought  (and  sold  be- 
tween banks.  There  is  an  open  market  in  banking  circles 
for  the  bills  of  exchange,  and  the  law  of  demand  and  supply 
operates  in  the  sales  made  practically  the  same  as  in  the 
sales  of  commodities  in  wholesale  markets.  This  fluid  con- 
dition of  the  market  makes  possible  a  steady  matching  of 
bills  due  to  foreigners  and  bills  due  from  foreigners,  and  a 
ready  cancellation  of  the  great  bulk  of  the  accounts  without 
the  direct  shipment  of  gold  between  countries. 

But  normal  exchange  is  built  upon  the  assumption  that 
gold  is  available  at  any  time,  and  that  balances  will  be  ad- 
justed by  gold  shipments.  The  relation  of  gold  to  exchange 
is  affected  by  the  differing  units  of  money  in  various  coun- 
tries. England's  unit  of  money  is  the  pound  sterling, 
which  contains  the  same  amount  of  gold  as  $4.8665  of 
American  money.  To  put  the  fact  the  other  way  around, 
the  English  pound  sterling  contains  4.8665  times  as  much 
gold  as  does  the  American  dollar.    This  ratio  is  called  the 


Money  and  Credit  419 

par  of  exchange  between  the  two  countries.  The  French 
money  unit,  the  franc,  contains  less  gold  than  the  American 
dollar.  The  dollar  has  5.18  times  as  much  gold  as  the  franc, 
and  this  ratio  is  the  par  of  exchange  with.  France.  The 
par  of  exchange  with  various  countries  is  therefore  the 
ratio  between  the  amounts  of  gold  contained  in  their  re- 
spective money  units. 

But  the  exchange  is  above  or  below  par  a  great  deal  of 
the  time,  and  the  fluctuations  in  normal  times  reflect  the 
demand  for  and  supply  of  bills  of  exchange.  If  New  York 
has  been  shipping  huge  exports  abroad,  it  will  also  have 
been  drawing  a  huge  supply  of  bills  of  exchange  on  foreign 
buyers.  This  huge  supply  of  bills,  thrown  onto  the  New 
York  exchange  market,  will  affect  the  relations  between 
the  demand  and  supply  of  bills,  and  the  price  of  exchange 
will  fall.  Supply  arid  demand  shape  the  price  of  bills  of 
exchange  in  much  the  same  way  as  they  shape  the  price  of 
wheat  or  any  tangible  commodity  in  the  market.  If  there 
is  a  large  supply  of  wheat  in  the  country,  the  price  paid 
tends  to  fall.  In  the  same  way,  if  there  is  a  large  supply 
of  bills  of  exchange  in  the  New  York  market,  the  price 
offered  by  those  bankers  who  buy  such  bills  will  tend  to 
fall.  The  rate  of  exchange  will  drop  perhaps  to  $4,865,  or 
even  to  $4,845.  But  it  would  not  drop  below  the  latter 
point  because  it  would  be  cheaper  for  buyers  to  pay  for 
goods  by  actual  shipment  of  gold  than  to  use  bills  of  ex- 
change at  so  low  a  price.  The  margin  between  $4,845  and 
$4,865  represents  the  cost  of  shipment  of  gold  between 
countries.  It  remains  true,  conversely,  that  if  the  supply 
of  bills  of  exchange  is  scarce  in  the  New  York  market  rela- 
tive to  demand,  the  price  will  tend  to  be  bid  up  above  par, 
but  not  above  $4,885,  because  beyond  this  point  it  would 
pay  to  ship  actual  gold  between  countries.^  When  the 
price  of  exchange  moves  either  way  beyond  these  limits,  or 
the  "gold  points,"  as  they  are  called,  the  fluctuations  tend 
to  be  checked  by  virtue  of  the  fact  that  it  will  pay  to  ship 

1  The  figures  for  the  gold  points  are  given  here  as  approximations. 
It  is  obvious  that  they  change  ass.  the  cost  of  sliipping  gold  between 
countries  changes. 


420  Money  and  Credit 

gold  between  countries.  This  imminent  possibility  of  gold 
shipment  serves  to  redress  the  balance  of  the  exchanges  and 
keep  them  within  a  fairly  close  margin  of  the  par  of  ex- 
change. 

The  international  bankers  of  one  country  organize  the 
flow  of  bills  of  exchange  and  the  clearance  of  international 
deposit  accounts  by  themselves  maintaining  deposit  ac- 
counts with  correspondent  banks  in  foreign  countries.  The 
making  of  payments  through  bills  of  exchange  is  conducted 
by  the  process  of  transferring  deposit  accounts  back  and 
forth  between  home  banks  and  their  correspondent  banks 
of  deposit  abroad.  For  example,  a  New  York  furniture 
exporter  ships  $1,000,000  worth  of  furniture  to  a  London 
buyer.  The  London  buyer  has  his  deposit  account  with  a 
London  bank.  This  London  bank  in  turn  has  a  deposit 
account  w'ith  a  correspondent  back  in  New  York.  The 
London  buyer  transfers  $1,000,000  of  his  bank  deposits  to 
the  account  of  the  London  bank,  and  the  latter  in  turn 
transfers  $1,000,000  of  its  deposits  wdth  its  correspondent 
bank  in  New  York  to  the  account  of  the  New  York  furni- 
ture dealer  who  shipped  the  goods.  This  method  of  trans- 
ferring bank  deposits  from  party  to  party  and  bank  to 
bank  between  countries  is  essentially  the  same  in  principle 
as  the  method  of  clearings  between  banks  within  a  country 
in  its  domestic  credit  transactions. 

It  remains  to  be  observed  that  if  the  discrepancy  be- 
tween the  demand  and  supply  for  bills  of  exchange  should 
remain  for  any  considerable  time  at  a  point  so  great  as  to 
cause  large  international  shipments  of  gold,  the  shift  in 
gold  reserves  between  countries  will  so  affect  interest  rates 
and  price  levels  in  the  countries  concerned  as  to  bring  the 
financial  and  trade  relations  gradually  back  to  normal,  and 
to  bring  the  rate  of  exchange  back  approximately  to  par. 

The  supply  of  bills  of  exchange  in  the  United  States 
drawn  on  foreign  countries  arises  not  only  from  the  expor- 
tation of  goods,  but  also  from  sales  of  American  stocks  and 
bonds  to  foreign  buyers,  from  loans  extended  by  foreign 
bankers  to  American  bankers,  and  from  international  ser- 
vices rendered  by  Americans,  such  as  providing  foreign. 


Money  and  Credit  421 

travelers  in  America  with  funds,  rendering  legal  services 
to  foreign  concerns,  etc.  All  such  international  transac- 
tions give  rise  to  a  flow  of  payments  from  abroad  to  Ameri- 
can creditors.  A  demand  for  bills  of  exchange,  that  is,  for 
a  means  of  providing  an  outflow  of  payments  from  Amer- 
ica, arises  from  essentially  the  converse  of  these  various 
dealings  between  nations.  Before  the  war,  America's  ex- 
ports considerably  exceeded  her  imports,  and  this  excess 
represented  so  much  payment  due  Americans  above  Ameri- 
can payments  due  foreigners.  This  excess  value  was,  how- 
ever, offset  by  the  other  factors  which  affect  the  supply  and 
demand  for  credit  settlements,  because  Americans  had  to 
meet  heavy  interest  and  dividend  payments  on  the  $6,000,- 
000,000  of  American  stocks  and  bonds  held  by  foreign  in- 
vestors; they  had  to  pay  premiums  on  insurance  held  by 
foreign  companies;  they  had  to  pay  interest  to  bankers 
making  loans  in  America ;  they  had  to  pay  freight  bills  to 
foreign  ship  owners  who  largely  carried  American  goods; 
and  they  had  to  meet  the  expenses  of  the  numerous  Ameri- 
cans traveling  abroad.  The  foreign  payments  for  Amer- 
ica's huge  exports  were  therefore  made  partially  by  goods, 
but  also,  and  to  a  substantial  degree,  by  numerous  other 
forms  growing  out  of  a  wide  variety  of  services  and 
dealings.  To  quote  F.  W.  Taussig,  "During  the  quarter 
century  preceding  the  great  war,  we  had  a  large  excess  of 
merchandise  exports.  That  excess  enabled  us  to  meet  some 
heavy  obligations  of  our  own  toward  foreign  countries. 
Through  it  we  were  able  to  pay  the  expenses  of  our  tourists 
in  Europe,  freight  charges  on  our  imports  and  exports  car- 
ried in  foreign  vessels,  to  meet  accruing  interest  and  divi- 
dends on  external  holdings  of  our  securities,  to  remit  the 
sums  which  foreigners  newly  arrived  in  this  country  were 
sending  to  friends  and  relatives  in  their  home  countries."^ 
All  this  describes  the  normal  conditions  before  the  war. 
Since  1914,  the  conditions  of  credit,  trade  and  exchange 
have  immensely  changed.  Soon  after  the  outbreak  of  war 
in  Europe  in  1914,  the  exchange  rate  for  British  sterling 
soared  as  high  as  $7.00.    After  the  first  shock  to  commerce 

"i-  Economic  ^Yorld,  Vol.  21,  p.  811. 


422  Money  and  Credit 

and  credit  was  past,  orders  for  war  materials  came  from 
Europe  in  such  large  amounts  that  a  vast  supply  of  bills  of 
exchange  were  thrown  upon  the  American  market,  and  this 
supply  caused  the  price  of  exchange  to  decline  far  below 
par.  When  the  decline  had  reached  $4.48,  the  British  Gov- 
ernment interfered  with  the  normal  operation  of  the  ex- 
change mechanism,  and  by  various  devices  arbitrarily 
maintained  the  exchange  rate  at  a  minimum  point  of 
$4,765.  Other  European  countries  followed  suit.  This 
''pegging"  of  the  exchanges,  as  it  is  termed,  lasted  until 
about  four  months  after  the  armistice  was  signed.  The 
European  governments  then  released  the  exchange  rates  to 
the  working  of  natural  forces,  with  the  result  that  rates 
declined  violently.  In  1920  the  rate  of  exchange  in  the 
pound  sterling  fell  as  low  as  $3.18,  rose  again  to  about 
$4.00,  and  in  February,  1922,  was  ranging  close  to  $4.30. 
The  decline  in  the  exchanges  of  other  leading  European 
currencies  has  been  on  an  even  greater  scale.  One  of  the 
greatest  declinations  has  occurred  in  the  German  mark, 
which  fell  from  a  par  of  about  24  cents  per  mark  before  the 
Avar  to  about  one-third  of  a  cent  per  mark  in  the  fall  of 
1921. 

The  depreciation  of  exchange  has  led  Europe  to  make 
huge  shipments  of  gold  to  the  United  States.  The  immense 
volume  of  gold  importations  has  swollen  the  reserves  of  the 
banks  in  this  country,  and  these  swollen  reserves  have  been 
the  basis  for  the  tremendous  credit  expansion  in  America 
since  the  beginning  of  the  war. 

"Gold  has  practically  disappeared  from  the  channels  of 
trade  of  nearly  all  important  European  countries  and  in 
its  place  we  find  a  group  of  heterogeneous  paper  currencies, 
which  have  been  issued  frequently  in  such  volume  that 
many  of  them  lack  any  semblance  of  stability  of  value.  "^ 
The  huge  issues  of  paper  money,  inconvertible  into  gold,  in 
European  countries  have  caused  the  values  to  depreciate 
far  below  normal  standards.  The  purchasing  power  of 
these  countries  has  diminished  as  a  direct  consequence  of 
war  financing  in  which  the  convertible  gold  standard  was 
iH.  A.  E,  Chandler,  Economic  World,  May  21,  1921. 


Money  and  Credit  423 

abandoned,  and  paper  money  flooded  the  European  cur- 
rency supplies.  The  reason  for  the  great  decline  in  the 
rate  of  foreign  exchange  on  American  markets  lies  in  the 
extraordinary  fall  in  the  purchasing  power  of  the  foreign 
currencies.  The  general  theory  which  accounts  for  the  low 
rates  of  exchange  may  be  stated  as  follows:  the  valuation 
in  one  country  of  the  money  of  a  foreign  country  will  de- 
pend upon  the  relative  purchasing  power  of  the  currencies 
of  the  two  countries.  The  theory  is  to  the  effect  that  the 
primary  reason  for  the  wide  divergence  of  foreign  ex- 
changes from  their  gold  parity  is  found  in  the  relative 
depreciation  of  currencies  in  different  countries,  or,  to  put 
the  same  idea  in  another  way,  in  the  relative  domestic  pur- 
chasing power  of  the  currencies  of  different  countries.^ 
After  a  careful  statistical  survey  of  the  fluctuations  in 
purchasing  power  of  the  currencies  of  various  countries  in 
comparison  with  the  fluctuations  in  exchange  rates,  the 
Federal  Reserve  Board  has  lent  its  authority  to  the  sound- 
ness of  the  theory.  The  pre-war  conditions  of  exchange  are 
clearly  subject  to  a  drastic  alteration  in  the  light  of  de- 
velopments occasioned  by  the  war.  The  new  economic  con- 
ditions amend  the  principle  that  exchange  will  not  be  able  to 
fluctuate  to  any  serious  degree  beyond  the  so-called  "gold 
points,"  and  the  new  conditions  force  the  thinking  of  eco- 
nomic students  on  the  subject  onto  a  new  plane. 

The  international  financial  relationship  of  the  United 
States  has  been  transformed  by  the  war.  Before  the  war, 
this  country  was  a  debtor  nation,  owing  to  Europe  through 
investments  held  abroad  and  through  loans  approximately 
$6,000,000,000.  Today  this  country  is  a  creditor  nation, 
and  a  creditor  on  a  grand  scale.  The  United  States  bought 
back  in  the  neighborhood  of  $5,000,000,000  worth  of  the 
American  securities  which  were  formerly  owned  abroad, 
and  extended  government  loans  to  Europeans  to  the  amount 
of  about  $11,000,000,000  and  private  loans  on  trade  ship- 
ments of  about  $3,500,000,000.  In  the  meantime,  the  ex- 
port trade  of  the  United  States  has  been  so  greatly  in  excess 
of  her  import  trade  that  an  enormous  trade  balance  of 

1  See  G.  Casscl,  Federal  Reserve  Bulletin,  December,  1920,  p.  1278. 


424  Money  and  Credit 

exports  over  imports  has  been  built  up  in  the  last  seven 
years,  amounting  all  told  to  more  than  $17,000,000,000. 
The  United  States  is  heavily  a  creditor  nation ;  her  exports 
greatly  exceed  her  imports;  the  rates  of  foreign  exchange 
have  departed  violently  from  their  normal  standards;  the 
United  States  alone  of  the  great  economic  powers  has  come 
through  the  war  with  her  gold  standard  intact;  all  in  all, 
the  international  financial  relations  of  the  United  States 
are  profoundly  transformed. 

The  new  financial  status  of  the  United  States  has  made  it 
necessary  for  American  banks  to  finance  with  their  own 
resources  the  great  buUi  of  America's  foreign  trade.  Prior 
to  the  war,  London  was  the  center  of  the  world's  interna- 
tional banking.  Years  of  banking  history  had  firmly  en- 
trenched London  banks  in  the  confidence  of  the  business 
men  of  the  world.  New  York  as  a  center  of  international 
banking  was  distinctly  subordinate  to  the  great  world 
center,  London.  The  new  financial  status  of  the  United 
States  has  practically  forced  American  banks  to  develop 
for  themselves  international  credit  facilities  on  the  large 
scale  necessary  to  accommodate  America's  enormous  post- 
war foreign  trade. 

Under  the  pre-war  status,  the  amount  of  payment  which 
Americans  made  to  foreigners  annually,  in  the  form  of 
interest  on  securities  and  loans  held  abroad,  in  the  form  of 
expenditures  of  American  tourists  abroad,  immigrant  funds 
sent  home,  freights,  insurance  and  the  like,  came  to  about 
$500,000,000.  America  was  able  to  make  this  payment  by 
the  excess  of  her  exports  over  imports.  Under  the  post-war 
status,  foreign  countries  are  obliged  to  remit  to  the  United 
States  annually  about  $600,000,000,  because  of  interest  due 
on  foreign  securities  and  loans  held  in  America.  At  pres- 
ent, Europe  cannot  pay  these  sums  by  exports  to  the  United 
States.  Europe  is  so  strongly  in  need  of  goods  from  the 
United  States  that  European  imports  from  the  United 
States  considerably  exceed  exports  to  the  United  States, 
Consequently,  the  creditor  relationship  of  the  United  States 
tends  constantly  to  become  greater. 

A  variety  of  banking  developments  have  taken  place  in 
an  attempt  to  equip  American  trade  to  meet  the  new  posi- 


Money  and  Credit  425 

tion.  Under  the  Federal  Reserve  Law  the  Federal  Reserve 
Bank  of  New  York  has  entered  into  mutual  relations  to  act 
as  correspondents  or  agencies,  with  the  banks  of  numerous 
foreign  countries.  Also,  national  banks  which  are  mem- 
bers of  the  Federal  Reserve  System  may,  under  the 
supervision  of  the  Federal  Reserve  Board,  establish 
branches  abroad.  Under  this  provision,  the  National  City 
Bank  of  New  York  City  has  established  more  than  forty 
foreign  branches,  distributed  among  the  strategic  commer- 
cial centers  of  the  world.  Another  extension  of  foreign 
banking  facilities  has  taken  the  form  of  creating  and  ex- 
panding correspondent  relations  with  foreign  banks,  and 
the  banking  relations  thus  formed  provide  Americans  with 
banking  service  in  virtually  every  important  foreign  com- 
mercial and  financial  center.  At  the  same  time,  a  number 
of  banks  have  expanded  their  foreign  departments  greatly 
and  their  representatives  are  increasingly  spending  their  time 
abroad  in  personal  study  of  international  credit  problems. 

American  banks  are  able  to  undertake  these  new  finan- 
cial responsibilities  because  of  the  new  provisions  of  the 
Federal  Reserve  Act.  The  new  reserve  act  authorized  an 
acceptance  market  in  American  banks,  and  the  result  is 
that  bills  of  exchange  can  be  drawn  in  dollars  on  American 
banks.  In  1920,  about  $5,000,000,000  worth  of  acceptances 
were  dealt  in  by  American  bankers,  most  of  them  drawn  in 
connection  with  foreign  trade.  The  acceptances  handled 
by  American  national  banks  are  limited  to  periods  not  to 
exceed  six  months,  and  such  foreign  trade  as  can  be  financed 
by  short-term  credits  has  been  facilitated  by  the  new 
American  acceptance  market  fostered  under  the  Federal 
Reserve  System.  This  new  market  is  slow  in  development, 
but  promises  to  expand  gradually  and  to  attain  a  steadily 
increasing  importance. 

In  addition  to  these  expanded  banking  facilities,  two 
types  of  foreign  credit  corporation  have  been  authorized 
under  the  Edge  Act,  and  hold  large  promise  for  the  future 
of  American  banking.  One  type  undertakes  the  extension 
of  foreign  credits  by  the  use  of  acceptances,  and  their 
services  are  broader  than  those  of  the  merely  national  com- 


426  Money  and  Credit 

mercial  banks  because  they  are  allowed  to  handle  ac- 
ceptances running  for  periods  longer  than  six  months, 
usually  about  one-year  periods.  The  acceptances,  for  long 
and  short  periods,  of  all  types  of  banking  institutions  are 
included  in  the  estimated  total  of  $5,000,000,000  for  the 
year  1920.  International  conditions  are  such  that  even 
these  long-term  credits  are  not  adequate  to  finance  the 
needed  trade  between  America  and  foreign  countries.  So 
large  a  number  of  business  houses  abroad  are  under  the 
obligation  of  recovering  from  their  wartime  prostration 
that  they  cannot  pay  for  goods  bought  from  America  for 
several  years  to  come.  Nevertheless,  if  these  industries 
abroad  are  to  get  onto  their  feet,  they  must  have  American 
supplies,  and  the  second  type  of  foreign  financing  corpora- 
tion is  devoted  to  supplying  the  long-time  loans  requisite 
for  the  revival  of  such  foreign  industries.  The  process  of 
credit  extension  has  already  been  partially  described  under 
the  section  dealing  with  foreign  investment  trusts.  The 
American  institutions  are  authorized  to  make  loans  to  for- 
eign concerns,  using  the  stocks  and  bonds  of  these  corpora- 
tions as  collateral  for  the  loans ;  and,  in  turn,  the  American 
institutions  are  authorized  to  issue  their  own  securities  for 
the  investment  of  the  American  public.  The  two  types  of 
foreign  financing  have  brought  into  being  more  than  a 
score  of  American  banking  corporations.  They  are  under 
the  supervision  of  the  Federal  Reserve  System,  and  offer 
large  services  to  American  foreign  trade  in  the  future. 
Owing  to  the  unstable  political  and  financial  conditions  of 
Europe,  the  longtime  risks  of  the  second  type  of  foreign 
credit  have  discouraged  bankers  from  organizing  such  de- 
benture credit  institutions.  As  European  conditions  be- 
come stabilized,  there  is  good  reason  to  anticipate  their 
gradual  promotion  among  American  bankers. 

In  addition  to  all  these  private  efforts  under  government 
incorporation  and  supervision  to  cope  with  America's  finan- 
cial needs,  there  exists  the  War  Finance  Corporation,  em- 
powered to  assist  exporters  with  credit  derived  from 
government  resources.  This  credit  has  been  used  to  facil- 
itate the  international  shipment  of  agricultural  products, 


Money  and  Credit  427 

and  is  an  important  supplement  to  the  other  agencies  of 
international  credit. 

The  problem  of  financing  foreign  trade  is  by  no  means 
solved.  Old  habits,  traditions  and  prejudices  are  still 
powerful  and  often  discouraging,  but  the  will  and  deter- 
mination to  undertake  the  responsibility  of  providing 
American  credit  for  American  trade  is  certainly  apparent, 
and  with  the  mind  of  American  bankers  turned  in  that 
direction  there  is  strong  reason  to  feel  confident  that  the 
new  financial  status  of  the  United  States  will  be  wisely 
established. 

The  Dangers  of  the  Credit  System 

* '  Credit  is  so  delicate  a  thing  that  it  is  dangerous  to  talk 
about  it."  This  statement  by  the  wartime  president^  of 
America 's  largest  bank  suggests  that  at  the  very  time  when 
the  credit  system  is  performing  the  indispensable  functions 
which  have  been  described  up  to  this  point,  it  also  is  loaded 
with  possibilities  of  danger,  and  even  of  disaster. 

Business  Cycles 

Business  depression  and  financial  panic  are  imminent 
possibilities  in  the  modern  price  system.  The  normal  state 
of  economic  life  is  not  an  even  flow  of  economic  activity, 
but  a  stage  of  transition  from  prosperity  to  depression  or 
from  depression  to  prosperity.  Depression  automatically 
sets  at  work  forces  which  breed  gradual  prosperity  cul- 
minating in  a  crisis,  or  even  in  a  panic ;  and  the  crisis  in 
turn  automatically  sets  at  work  forces  which  put  the  eco- 
nomic system  through  the  experiences  of  depression.  The 
pendulum  swings  from  one  extreme  to  another  on  tlie  aver- 
age every  seven  to  ten  years,  and  the  economic  history  of 
America  is  replete  with  these  periodic  fluctuations.  Eco- 
nomic life  is  never  static;  it  is  always  dynamic,  always  in 
process  from  one  stage  to  another.  The  business  cycle  is  a 
paramount  feature  of  all  economic  calculation. 

The  cycles  of  business  are  not  planned  by  conspirators, 
but  are  inherent  phenomena  in  the  natural  processes  of  the 

1  F.  A.  Vanderlip,  "What  Happened  to  Europe,"  p.  98. 


428  Money  and  Credit 

credit  system.  Prosperity  cannot  continue  for  more  than  a 
few  years  at  a  time  because  of  factors  inherent  in  the  credit 
system,  factors  which  the  dominating  business  leaders  have 
up  to  date  found  no  way  of  controlling  adequately.  As 
business  comes  into  a  state  of  high  prosperity,  the  costs 
increase  faster  than  the  income.  Briefly  this  process  takes 
place  as  follows:  Concerns  resort  to  the  use  of  old  equip- 
ment, out-of-date  machinery,  and  badly  located  plants  in 
order  to  fill  big  orders,  and  all  such  manufacturing  methods 
involve  extraordinary  costs  per  unit  of  product.  Wages 
tend  to  rise  unusually  high,  and  the  efficiency  of  labor  falls 
off.  Prices  of  raw  materials  rise  faster  and  higher  than 
prices  of  finished  products,  and  interest  and  discount  rates 
ascend  on  a  like  scale.  The  efficiency  of  management  tends 
to  decline  because  of  the  rush  and  confusion  of  overloaded 
business.  The  expanded  business  rests  very  largely  upon 
borrowed  funds,  and  as  the  loans  increase  they  approach  a 
point  where  they  threaten  to  exceed  the  legitimate  ratio  to 
bank  reserves.  A  tension  in  the  money  market  arises,  in- 
terest rates  gradually  increase  costs,  and  a  general  credit 
stringency  prevails.  Under  these  influences,  profits  suffer  a 
reversal.  The  costs  advancing  disproportionately  eat  up  the 
margin  between  total  cost  and  selling  price  and  in  numerous 
industries  the  very  prosperity  which  originally  brought  fine 
profits  evolves  conditions  which  in  the  end  bring  drastic 
profit  reductions.  But  the  security  behind  the  large  loans 
upon  which  business  depends  is  faith  in  the  ability  of  busi- 
ness to  earn  large  profits.  The  threatened  reduction  of 
profits  therefore  undermines  that  element  of  business  con- 
fidence which  is  the  basis  of  credit.  This  condition  over- 
takes specially  unfortunate  business  concerns  first.  The 
creditors  which  have  supplied  them  with  loans  become 
alarmed  and  fearful  lest  their  money  cannot  be  repaid  un- 
less it  is  called  in  at  the  earliest  opportunity.  Creditors, 
for  the  same  reason,  deem  it  unsafe  to  renew  old  loans  or  to 
make  new  ones.  Without  extensions  of  credit,  the  most 
unfortunate  industries  face  a  crisis.  With  the  news  of 
their  jeopardy,  the  feeling  of  nervousness  and  lack  of  con- 
fidence spreads  to  other  businesses,  and  a  general  process 


Money  and  Credit  429 

of  squeezing  debtors  takes  place.  The  crisis  has  been 
reached,  the  apex  of  prosperity,  and  the  forces  which 
brought  it  about  were  natural,  inherent  forces  which 
evolved  their  dangerous  consequences  as  a  matter  of  the 
due  and  normal  course  of  events. 

The  crisis  has,  in  years  past,  frequently  plunged  into 
panic.  Bankruptcies,  failures,  financial  disasters  have  oc- 
curred on  every  hand.  It  is  widely  hoped  that  the  Federal 
Keserve  System  has  brought  credit  under  sufficient  control 
to  avert  the  outright  panic.  By  the  processes  already  de- 
scribed of  mobilizing  the  reserves  of  all  the  banks  to  come 
to  the  rescue  of  those  most  hard  pressed,  bank  failures  are 
reduced  to  a  minimum.  By  the  processes  of  loaning  and  re- 
discounting  between  reserve  banks  and  member  banks,  the 
banks  are  able  for  the  most  part  to  rescue  business  concerns 
at  the  crucial  moment  and  avoid  the  extreme  calamity  of 
bankruptcy.  By  the  processes  of  raising  the  interest  and 
discount  rates  on  the  loans  to  member  banks  for  some  time 
before  the  anticipated  crisis,  the  reserve  banks  can  dis- 
courage unwise  and  speculative  loans,  and  prevent  the 
forces  of  crisis  from  securing  too  complete  a  grip  on  the 
economic  order.  The  Federal  Reserve  System  is  looked 
upon  generally  as  being  "panic-proof."  But  it  is  not 
looked  upon  as  having  the  power  or  the  capacity  to  prevent 
the  fluctuations  which  lead  from  prosperity  to  crisis,  and 
the  ensuing  depression. 

The  period  of  depression  is  a  time  of  recovery  and  read- 
justment. Business  failures  increase,  unemployment  is 
widespread,  and  consumers  out  of  work  have  a  reduced 
purchasing  power  and  a  reduced  demand  for  commodities. 
People  are  wary  of  investment  in  new  enterprises,  and  the 
value  of  securities  reaches  a  low  level.  Prices  of  all  com- 
modities tend  to  fall,  interest  rates  to  decline,  and  wholesale 
and  raw  material  prices  tend  to  drop  more  than  other 
prices.  Laborers  who  can  get  work  increase  their  efficiency 
in  the  hope  that  thereby  they  will  win  the  favor  of  their 
employers  and  will  not  be  laid  off.  The  costs  of  doing  busi- 
ness decrease.  The  stocks  of  goods  piled  up  during  pros- 
perity are  gradually  sold  out.    The  consumers'  strike  passes, 


430  Money  and  Credit 

new  production  is  required,  bargain  prices  in  stocks  and 
bonds  invite  people  to  snap  them  up  and  investment  re- 
vives, business  begins  to  pick  up,  expansion  recurs,  and 
gradually  economic  life  emerges  from  the  depression  to  the 
first  stages  of  a  new  era  of  prosperity.  The  cycles  continue, 
from  stage  to  stage,  from  transition  to  transition,  normally, 
naturally,  persistently.^ 

The  most  recent  industrial  crisis  occurred  in  its  severest 
aspects  during  1920  and  1921.  The  armistice  was  followed 
by  an  outburst  of  prosperity  accompanied  by  all  those  un- 
dermining forces  which  evolve  an  industrial  crisis.  Costs 
of  production  increased,  wages  went  up,  efficiency  dropped, 
and  profits  exhibited  a  marked  decline.  Prices  had  risen 
greatly,  having  reached  in  such  commodities  as  clothing  and 
house  furnishings  a  level  of  353  and  331  per  cent,  respec- 
tively above  the  level  of  1913,  and  in  the  wholesale  market 
building  materials  having  risen  as  high  as  341  per  cent, 
over  1913.  These  extraordinary  prices  started  a  general 
refusal  of  consumers  to  buy  these  commodities,  and  the  re- 
fusal thus  begun  spread  broadcast  until  a  general  "con- 
sumers' strike"  was  in  effect  in  1920.  The  expansion  of 
bank  deposits  reached  a  maximum,  and  in  1920  the  Federal 
Keserve  took  steps  to  discourage  further  loans  by  increasing 
the  discount  rate.  Unemployment  became  widespread, 
manufacturers  shut  down  or  ran  at  fractional  capacity,  and 
a  general  depression  prevailed  throughout  1920,  continuing 
into  1921.  The  depression  was  accentuated  by  interna- 
tional conditions.  The  amount  of  the  reparations  payment 
to  be  made  by  Germany  still  remained  uncertain  in  1921, 
and  exports  fell  off  decidedly,  owing  to  unsettled  economic 
conditions  abroad  and  to  limited  international  credit  facili- 
ties.^ 

The  business  crisis  and  depression  brings  in  its  course  no 
small  amount  of  human  distress  and  economic  waste.  Pro- 
duction of  all  the  comforts  and  luxuries  of  life  is  dras- 
tically cut,  and  millions  of  men  face  the  prospect  of  months 
without  income,  with  all  that  such  a  situation  means  in 
terms  of  anxiety,  poverty,  and  privation.    A  psychology  of 

1  See  W.  C.  Mitchell,  "Business  Cycles,"  especially  pp.  475-599. 

2  David  Friday,  Review  of  Hevietos,  February,  1921,  pp.  170-172. 


Money  and  Credit  431 

fear  saturates  the  men  in  the  business  world,  and  the  morale 
of  workers  is  dissipated  by  loss  of  jobs.  Probably  no  other 
loss  in  modern  economic  life,  except  the  loss  from  war, 
compares  with  the  loss  accruing  from  the  extremes  of  busi- 
ness cycles.  To  the  country  as  a  whole,  a  depression  is  the 
cause  of  almost  incalculable  waste  and  of  enormous  human 
suifering.  It  brings  no  substantial  good,  except  as  it  is 
necessary  in  dissolving  the  peak  of  prosperity  and  spinning 
the  credit  system  through  another  cycle.  No  one  hopes  to 
eliminate  completely  business  cycles  under  the  credit  system 
of  modern  industry.  They  are  part  and  parcel  of  the  eco- 
nomic order  under  the  modern  price  system.  But  there  is 
every  right  to  expect  that  the  extremes  of  the  cycles  can 
be  substantially  alleviated.  The  Federal  Reserve  System 
saved  the  country  from  a  full-fledged  panic  in  the  crisis  of 
1920,  and  thereby  eradicated  from  the  period  of  business 
crisis  the  most  painful  excesses.  No  reason  is  apparent 
why  the  sufferings  of  the  business  cycle  cannot  be  reduced 
materially.  It  would  be  foolhardy  to  attempt  to  eliminate 
cycles  altogether.  But  it  would  be  equally  foolhardy  to 
flinch  from  the  plain  necessity  to  stabilize  business  much 
beyond  the  present  point.  Indeed,  no  one  should  be  blind 
to  the  fact  that  the  price  system  is  a  tremendous  challenge 
to  the  chief  operators  of  the  industrial,  commercial  and 
financial  system, — a  challenge  that  industry  must  be  sta- 
bilized more  thoroughly.  There  is  still  room  for  transi- 
tional eras,  for  action  and  reaction,  for  a  dynamic  economic 
life  with  seasonal  and  periodic  fluctuations  between  better 
and  worse,  but  the  great  responsibility  of  the  future  is  to 
eliminate  the  grossly  wasteful  and  deplorable  consequences 
of  crises  and  depressions.  To  stabilize  business  is  one  of 
the  pressing  problems  of  the  immediate  future,  and  its  mag- 
nitude and  importance  cannot  be  overstressed. 

Important  proposals  which  will  figure  in  this  evolution 
toward  more  stable  business  cannot  be  discussed  in  detail 
here,  but  some  of  the  chief  proposals  may  well  be  men- 
tioned briefly.  The  centralization  of  the  banking  system 
under  the  Federal  Reserve  Banks,  with  all  the  methods  for 
mobilizing  reserves,  securing  elasticity  of  credit,  and  regu- 


432  Money  and  Credit 

lating  the  volume  of  business  loans  by  manipulating  the 
interest  and  discount  rate,  has  raised  to  the  maximum  our 
immunity  from  downright  panics.  The  Federal  Reserve 
System  also  does  much  to  tide  businesses  over  the  tightest 
pinches  of  the  crisis  and  even  co-operates  with  them  in  a 
process  of  reorganization  of  their  broken  down  financial 
structure.  Secondly,  it  has  been  proposed  that  government 
and  railway  purchases  and  improvements  be  so  distrib- 
uted as  to  provide  employment  and  business  orders  when 
the  period  of  contraction  in  private  corporate  industry 
threatens.  Public  buildings,  highways,  and  enterprise  of 
all  sorts  could  be  used  as  a  kind  of  balance  wheel  to  sta- 
bilize the  transitional  eras  in  business.  Some  private  con- 
cerns already  announce  the  possibility  of  carrying  on  the 
construction  of  new  buildings  and  the  expansion  of  plant 
during  times  when  normal  production  tends  to  decline,  and 
point  out  the  distinct  advantage  of  profiting  by  the  low 
prices  of  building  materials  prevailing  usually  during  a 
period  of  depression.  Thirdly,  the  progress  in  personnel 
administration  made  by  pioneer  concerns  during  and  since 
the  war,  and  the  scientific  application  of  psychological 
principles  to  production,  promises  a  way  of  stabilizing 
efficiency  and  labor  costs  so  that  during  a  period  of  pros- 
perity they  will  not  encroach  upon  prices  and  profits  too 
rapidly.  During  the  crisis  and  depression  of  1920,  it  be- 
came known  that,  although  most  corporations  had  suffered 
from  unusually  high  wages  and  a  drastic  slump  in  labor 
efficiency,  nevertheless  there  were  a  substantial  number  of 
corporations  which  had  reduced  unit  labor  costs  by  the  use 
of  scientific  and  psychological  methods  of  labor  administra- 
tion. If  the  principles  already  demonstrated  by  these 
pioneer  corporations  can  be  generally  adopted,  the  new 
control  of  labor  cost  and  production  efficiency  will  do  much 
to  stabilize  prosperity  in  economic  life.  Fourthly,  the  war 
has  more  than  ever  linked  America  financially  and  com- 
mercially with  foreign  countries.  With  the  evolution  of 
banking  facilities  to  supply  proper  credit  for  foreign  trade, 
and  with  government  encouragement  and  greater  private 
interest  in  organizing  foreign  markets,  there  is  in  process 


Money  and  Credit  433 

of  growth  a  new  stabilizing  factor  in  the  form  of  foreign 
trade.  Foreign  markets  offer  an  outlet  for  an  excess  of 
production  above  domestic  needs,  and,  rightly  controlled, 
promise  to  alleviate  the  market  restrictions  of  domestic 
trade.  America  is  therefore  taking  strides  in  the  direction 
of  a  greater  stabilization  of  business  to  the  extent  that  she 
accepts  the  opportunity  in  international  commerce  which 
the  war  has  thrust  upon  her.  In  the  fifth  place,  the  infinite 
interrelations  of  modern  business  call  for  the  light  shed  by 
national  and  international  economic  statistics.  In  the  past 
the  collection  of  statistical  information  on  all  branches  of 
production,  commerce  and  credit  has  been  decentralized 
and  scattered,  with  the  result  that  the  calculations  and 
anticipations  of  business  men  have  been  made  partially  in 
the  dark.  The  first  cure  for  over-production  during  a 
period  of  prosperity  would  be  to  make  known  to  all  pro- 
ducers just  how  much  of  each  commodity  has  been  and  is 
being  produced.  The  Department  of  Commerce  of  the 
Federal  Government  has  announced  plans  for  co-ordination 
and  centralization  of  statistical  service  for  business  men. 
The  Federal  Reserve  Board,  through  its  regular  bulletins, 
has  already  taken  important  steps  in  the  direction  of  more 
adequate  financial  and  industrial  data.  Adequate  statistics 
may  serve  as  economic  barometers  in  the  calculations  of 
business  men  and  should  lead  to  accurate  economic  fore- 
casting. 

Finally,  the  proposal  to  stabilize  price  levels  deserves 
most  serious  consideration.  A  recent  writer,  referring  to 
the  price  changes  with  the  last  business  cycle,  declares : 
' '  The  United  States  has  maintained  the  gold  standard  with- 
out serious  limitation  and  has  reorganized  its  banking  sys- 
tem on  approved  lines.  Nevertheless  we  have  had  price 
fluctuations  almost  as  violent  as  those  of  the  greenback 
period.  These  fluctuations  have  caused  unmerited  suffering 
to  millions  of  families  and  have  heaped  unearned  riches 
upon  thousands.  They  have  caused  wasteful  struggles,  en- 
couraged extravagance  among  some,  and  created  the  class 
of  "new  poor."  They  have  promoted  speculation  and  re- 
duced the  efficiency  of  management  and  labor.     We  are 


434  Money  and  Credit 

poorer  in  goods,  more  quarrelsome  in  spirit,  less  ready  to 
work  because  of  these  fluctuations.  All  this  has  happened 
and  is  irretrievable.  But  within  a  few  years  fresh  changes 
may  happen  just  as  evil  in  their  consequences.  This 
wretched  record  and  this  wretched  prospect  are  a  grave 
indictment  of  our  present  form  of  economic  organization."^ 
The  frequent  changes  in  the  price  level  have  deep  effects 
upon  the  purchasing  power  of  the  income  of  many  classes 
of  people.  Rising  prices,  with  a  rising  cost  of  living,  bring 
a  struggle  among  wage  earners  to  have  their  wages  raised 
in  order  to  keep  pace  with  increased  prices ;  and  as  soon  as 
the  peak  is  reached,  and  prices  begin  to  fall,  employers 
commence  to  cut  wages  correspondingly,  and  wage  earners 
suspiciously  and  distrustfully  fight  the  cutting  process. 
The  upward  and  downward  swings  of  the  price  level  serve 
as  most  aggravating  causes  of  the  industrial  unrest  which 
everybody  abhors.  Incomes  derived  from  conservative  in- 
vestments were  practically  cut  in  two  by  the  sharp  decline 
in  the  purchasing  power  of  the  dollar  during  the  war  and 
after.  Fixed  salaries  likewise  suffered  a  severe  dwindling 
in  their  purchasing  power,  insurance  policies  depreciated 
in  value,  pensions  were  halved  in  purchasing  power.  In  a 
period  of  declining  prices,  numerous  classes  suffer  in  like 
degree.  Rising  prices  virtually  confiscate  a  considerable 
part  of  the  value  of  fixed  incomes,  salaries,  etc.,  and  of 
property  investment.  For  the  protection  of  conservative 
property  interests  and  for  the  proper  conservation  of  the 
life  and  welfare  of  labor,  it  is  of  the  utmost  importance 
that  a  greater  stabilization  of  prices  be  attained. 

A  plan  very  thoughtfully  advocated  at  present  is  that 
known  as  "stabilizing  the  dollar."  The  plan  is  chiefly  fos- 
tered by  Irving  Fisher  of  Yale  University,  and  has  come  to 
hold  the  serious  attention  of  a  large  number  of  careful  and 
prominent  economists  and  bankers.  It  rests  in  large  meas- 
ure upon  the  quantity  theory  of  prices.  In  its  simplest 
terms,  the  quantity  theory  states  that  prices  equal  the  quan- 
tity of  money  times  its  velocity  of  circulation  plus  the 

1 W.  C.  Mitchell,  American  Econormc  Review,  March,  1920,  Sup- 
plement, p.  155;  See  also  American  Economic  Review,  Supplement, 
March,   1922. 


Money  and  Credit  435 

quantity  of  credit  (for  the  most  part,  bank  deposits)  times 
its  velocity  of  circulation,  divided  by  the  number  of  units 
of  trade.  The  velocity  of  circulation  refers  to  the  number 
of  times  which  a  dollar  changes  hands.  The  rate  of  turn- 
over of  money  and  credit  affects  the  influence  of  a  given 
amount  of  money  and  credit  on  prices,  A  large  volume  of 
money  and  credit  instruments,  passing  rapidly  between 
buyers  and  sellers  and  producers  and  consumers  has 
direct  effects  on  price  levels.  The  rate  of  circulation  varies 
greatly  from  time  to  time,  but  statistics  at  present  indicate 
that  the  rate  of  turnover  for  money  ranges  in  the  neighbor- 
hood of  twenty  times  a  year,  and  of  credit  forty  to  sixty  a 
year.  The  quantity  of  the  medium  of  exchange  in  its  en- 
tirety, multiplied  by  the  rate  of  its  passing  from  hand  to 
hand,  fundamentally  determines  price  levels,  so  the  theory 
runs. 

The  influence  of  the  volume  of  medium  of  exchange, 
moreover,  depends  upon  its  standard  of  value,  which  is 
gold.  Paper  money  or  deposit  currency  is  redeemable  in 
gold  and  hence  represents  the  same  standard  of  value  as 
gold.  This  standard  of  value  arises  from  the  intrinsic 
worth  of  the  23.22  grains  of  pure  gold  in  each  dollar.  The 
proposal  to  "stabilize  the  dollar"  is  to  change  the  amount 
of  gold  in  the  dollar  according  as  prices  tend  to  go  up  or 
down.  Price  levels  can  be  measured  by  index  numbers, 
arrived  at  by  statistical  averages  of  prices  from  time  to 
time.  To  quote  Irving  Fisher:  "In  short,  then,  our  rule 
or  criterion  of  adjustment  is  simply  this:  for  every  one  per 
cent,  of  deviation  of  the  index  number  above  or  below  par 
found  at  any  adjustment  date,  we  then  increase  or  decrease 
the  dollar's  weight  by  one  per  cent."  If  it  be  objected  that 
confusion  would  result  from  coining  gold  dollars  of  varying 
weights,  the  explanation  is  given  that  the  gold  would  not  be 
coined,  but  would  remain  in  bullion  form,  and  would  be  a 
redemption^  fund  for  all  outstanding  paper  money  and 
credit  instruments.  As  a  matter  of  fact,  practically  all 
gold  coin  is  now  retired  from  circulation  and  used  as  re- 

1  For  a  clear  explanation  of  the  full  technical  details  of  this  im- 
portant plan  see  "Stabilizing  the  Dollar,"  by  Irving  Fisher, 


436  Money  and  Credit 

serves  against  outstanding  forms  of  currency.  Under  the 
plan  to  stabilize  the  dollar,  the  amount  of  gold  by  weight 
for  each  dollar  would  be  adjusted  by  keeping  the  gold  in 
bullion  form, 

A  sharp  controversy  over  the  practicability  of  this  plan 
has  raged  between  different  schools  of  economists  and  be- 
tween bankers.  The  proposal  is  of  immense  importance  to 
the  whole  price  system,  and  deserves  a  thoroughly  scientific 
analysis,  based  upon  full  and  complete  statistics  of  finance, 
and  a  most  constructive  consideration  of  the  economic  prin- 
ciples involved.^ 

The  quantity  theory  of  money  offers  a  partial  explana- 
tion of  the  changes  in  price  levels,  but  there  are  sharp  price 
changes  which  can  scarcely  be  attributed  to  changes  in  the 
quantity  of  money.  For  instance,  from  1915  to  1917,  there 
was  a  general  price  increase  in  the  United  States  of  85  per 
rent.,  caused  largely  by  the  heavy  demand  for  American 
goods  in  Europe  to  enable  those  countries  to  carry  on  the 
war.  As  this  extraordinary  demand  led  to  higher  prices, 
there  was  a  need  for  an  increase  in  the  circulating  medium, 
and  this  increase  of  money  came,  but  as  a  sequel  to  the 
price  increase  rather  than  its  cause.  During  the  years  when 
America  was  in  the  war,  price  increases  were  substantially 
checked  by  virtue  of  the  price-fixing  restrictions  of  the 
various  war  boards.  From  the  armistice  until  the  peak  of 
high  prices  in  1920,  the  price  level  rose  sharply  by  a  gain 
of  more  than  60  points.  The  only  exception  to  this  general 
rise  of  prices  appeared  in  the  first  two  or  three  months 
following  the  armistice,  when  a  slight  slump  in  prices  oc- 
curred. The  causes  of  the  general  increase  in  prices  follow- 
ing the  war  were  chiefly  the  foreign  demand  for  goods  to 
replace  the  stocks  of  goods  depleted  during  the  war,  and  to 
provide  equipment  for  reconstruction,  and,  secondly,  the 
growing  inefficiency  of  labor  with  consequent  mounting  of 
labor  costs.  The  rising  tide  of  prices  was  turned  when  a 
psychological  transformation  took  place  in  the  buying  pub- 

1  For  a  statement  of  criticism  of  the  theory,  see  Laughlin's  "Money 
and  Prices";  B.  M.  Anderson,  "The  Value  of  Money,"  and  David 
Friday,  "Profits,  Wages  and  Prices";  B.  M.  Anderson,  Economic 
World,  Aug.  7,  1920. 


Money  and  Credit  437 

lie  and  the  so-ealled  buyers'  strike  began.  The  consumers' 
strike,  a  general  effort  at  thrift  and  economy,  a  general 
waiting  for  prices  to  come  down,  dragged  the  price  level 
down  substantially  during  late  1920  and  throughout  1921. 
During  all  these  shifts  of  price  levels,  there  were  corre- 
sponding changes  in  the  volume  of  money  and  credit  in 
circulation  and  in  the  rate  of  turnover,  but  it  is  next  to 
impossible  to  ascertain  conclusively  in  each  case  whether 
the  high  prices  caused  more  currency  to  come  into  circula- 
tion or  the  increased  circulation  caused  higher  prices. 

The  quantity  theory  undoubtedly  explains  many  price 
movements,  but  does  not  satisfactorily  account  for  all  up 
and  down  alterations.  Changes  in  the  demand  for  goods, 
either  at  home  or  abroad;  changes  in  the  psychology  of 
consumers ;  changes  in  the  psychology  of  laborers,  measured 
in  labor  inefficiency;  changes  in  governmental  restrictions 
on  prices, — these  and  other  factors  exercise  determining  in- 
fluences over  prices,  and  should  be  included  in  any  inter- 
pretation of  prices  which  is  comprehensive.^ 

The  Dominant  Influence  of  Financial  Institutions 

If  any  of  the  institutions  of  economic  society  can  be  said 
to  be  dominant  in  the  active  direction  and  control  of  all 
phases  of  the  economic  structure,  they  would  be  the  finan- 
cial institutions.  All  modern  business  activity  is  dependent 
upon  borrowed  funds  and  currency  issues  for  its  main- 
tenance, and  loans  and  money  are  organized,  directed  and 
restricted  by  financial  institutions.  Investment  bankers 
select  certain  corporations  whose  securities  they  put  on  the 
market,  and  reject  others.  The  reasons  are  those  which  are 
good  and  sufficient  in  the  eyes  of  the  bankers.  If  the 
bankers  decide  to  withhold  their  aid  in  marketing  a  con- 
cern's securities,  this  refusal  may  make  impossible  the 
existence  of  the  concern.  This  dominant  position  of  in- 
vestment bankers  is  enhanced  by  the  large  degree  of  com- 
bination which  exists  between  bankers.    The  accusation  has 

1  See  David  Friday,  "Profits,  Wages  and  Prices,"  Chapters  VTTI 
and  TX;  also  G.  R.  Davies,  Journal  of  Political  Economy,  XXIX, 
pp.  213-222. 


438  Money  and  Credit 

been  made  by  some  authorities  that  this  combination  amounts 
to  a  money  trust.  In  1912  a  Government  Investigating  Com- 
mittee made  a  very  elaborate  investigation  of  the  charges. 
They  arrived  at  the  conclusion  that  the  combinations  of 
bankers  held  a  financial  power  which  was  a  menace  to  free 
competition  and  which  jeopardized  the  rightful  business 
interests  of  corporations  frowned  upon  for  any  reason  by 
the  money  power,  but  the  Committee  admitted  that  there 
was  no  evidence  that  this  immense  power  had  actually  been 
used  in  an  unjustifiable  manner.  The  appearance  of  a  new- 
comer among  industries  may  mean  the  threat  of  severe 
competition  against  an  old  concern  financed  through  a 
powerful  group  of  investment  bankers.  As  a  means  of  self- 
protection,  the  old  concern  may  attempt  to  scotch  the  new- 
comer before  it  is  hatched  by  persuading  the  bankers  to 
decline  to  market  its  securities.  This  is  a  theoretical  possi- 
bility, but  the  Committee  found  no  conclusive  evidence  that 
the  power  had  actually  been  so  used.  These  charges  of  one 
sort  and  another  have  never  been  well  enough  established 
by  evidence  to  convince  those  who  were  not  easily  amenable 
to  criticism  of  financial  interests  generally.  Certainly  the 
power  to  give  life  to  favored  industries  is  there,  and  the 
power  to  take  life  away  from  unwelcome  industries  is  there, 
and  probably  from  time  to  time  the  power  is  exercised  in 
questionable  ways.  But  the  investment  bankers  enjoy 
widely  the  reputation  of  basing  their  judgment  upon  funda- 
mental considerations  of  safety  and  security,  and  to  the 
extent  that  these  considerations  predominate,  the  bankers 
are  rendering  the  public  an  indispensable  service  in  pro- 
viding expert  analysis  of  investments  and  a  medium  for  the 
placing  of  money  where  it  will  bring  income  to  the  owner. 
The  making  of  commercial  loans  likewise  carries  a  domi- 
nating influence  over  business  houses.  A  threat  to  withhold 
future  loans  for  working  capital  is  sufficient  to  force  a 
business  into  the  adoption  of  almost  any  policy  of  reorgani- 
zation, retrenchment,  expansion,  or  what  not,  which  the 
bankers  may  desire.  The  charge  of  combination  between 
commercial  bankers  has  rarely  been  made.  The  money 
trust  is  a  term  applied  mainly  to  investment  bankers.    The 


Money  and  Credit  439 

co-operative  efforts  of  commercial  banks  through,  clearing 
houses,  bankers'  associations,  and  the  Federal  Reserve  Sys- 
tem lead  ordinarily  to  constructive  co-operation  and  are 
remarkably  free  from  dangerous  and  objectionable  discrimi- 
nation. During  the  post-war  crisis  and  depression,  com- 
mercial and  investment  bankers  co-operated  in  scores  of 
cases  to  tide  enterprises  which  were  hard  hit  over  a  period 
of  reorganization  and  recuperation.  The  co-operative  ef- 
forts of  credit  bankers  saved  scores  of  business  houses  from 
bankruptcy,  and  enabled  them  to  get  on  their  feet  again. 
In  no  previous  crisis  and  depression  have  the  bankers  co- 
operated in  such  constructive  ways  to  avert  outright  dis- 
asters among  suffering  corporations. 

Yet  the  bankers  are  not  free  from  grave  sins  of  omission. 
Farm  credits  have  not  been  available  promptly  and  at  the 
most  favorable  rates,  and  the  marketing  of  crops  has  suf- 
fered from  restricted  credit  facilities  so  greatly  as  to  cause 
huge  losses  to  farming  populations.^  The  bankers,  more- 
over, have  not  facilitated  the  building  of  homes  by  a  ready 
supply  of  credit  at  moderate  rates  of  interest.  Interest 
rates  on  call  money  have  been  at  times  exorbitant,  and 
during  the  period  of  recovery  from  the  business  depression 
after  the  war  not  a  few  bankers  were  sharply  accused  by 
bank  officials  of  exacting  unreasonable  terms  for  helping 
prostrated  industries  to  struggle  to  their  feet.  Small  busi- 
nesses which  might  prove  harmful  competitors  to  old  estab- 
lished companies,  such  as  the  big  steel  combinations,  the 
packing  houses,  the  mines,  or  the  railroads,  and  which 
might  by  this  competition  weaken  the  values  of  the  securi- 
ties of  these  big  companies  on  the  Wall  Street  Stock  Ex- 
change or  in  the  investment  market,  have  been  too  often 
frozen  out  of  existence,  so  it  is  charged,  by  the  organized 
bankers. 

A  prominent  feature  of  this  domination  by  bankers  is 
found  in  the  system  of  interlocking  directorates.  At  the 
time  of  the  Pujo  Investigation  in  1912,  it  was  found  that 
eighteen  of  the  largest  financial  institutions  were  affiliated 

1  See  Federal  Reserve  Bulletin,  September,  1921,  p.  1030;  also, 
"Proceedings  National  Conference  on  Agriculture,"  Jan-Fcb.,  1922. 


440  MoTiey  and  Credit 

by  interlocking  directorates  with  each  other  and  with  a 
vast  collection  of  industries  of  all  sorts.  In  all,  they  held 
"764  directorships  in  134  corporations  having  total  re- 
sources or  capitalization  of  $25,325,000,000."  Banks  are 
glad  to  have  some  of  their  executives  on  the  boards  of  direc- 
tors of  the  corporations  which  they  are  helping  to  finance 
because  it  enables  the  banks  to  secure  inside  information 
steadily  on  the  management  of  the  corporations,  and  to 
make  sure  that  the  interests  of  investors  are  amply  pro- 
tected. Corporations  are  usually  glad  to  have  prominent 
bankers  on  their  boards  of  directors.  The  iu'terlocking  di- 
rectorates establish  a  real  community  of  interest  between 
bankers  and  business  men,  and  concentrate  this  community 
of  interest  in  high  degree.  No  adequate  evidence  has  been 
produced  to  show  radical  abuse  of  the  power  created  by  this 
immense  financial  concentration.  It  is  equally  true  that  no 
adequate  evidence  has  been  produced  to  disprove  the  abuse 
of  the  power.  As  the  Pujo  Committee  declared,  "the  data 
have  not  been  available."  The  only  fact  Avhich  is  com- 
pletely established  is  that  the  financial  power  is  enormously 
concentrated,  and  at  any  time  might  be  used  in  dangerous 
ways.  The  sense  of  business  ethics  and  the  spirit  of  social 
obligation  which  prevails  among  the  leading  bankers  is  the 
only  real  safeguard  against  the  unwise  exercise  of  their 
financial  power.  Government  supervision  has  been  at- 
tempted, for  instance,  through  the  Clayton  Act,  forbidding 
interlocking  directorates  between  banks,  but  it  is  doubtful 
if  the  new  prohibition  has  materially  dissolved  the  com- 
munity of  interest  in  big  banking  and  big  business.  The 
influence  of  the  Federal  Reserve  System  upon  the  social 
use  of  financial  power  rests  largely  upon  the  high  sense  of 
social  responsibility  in  the  minds  of  bankers  themselves. 
The  Federal  Reserve  System  cannot  be  much  better  than 
the  level  of  economic  responsibility  in  the  spirits  of  the 
most  powerful  bankers.  The  only  genuine  guarantee  that 
the  huge  financial  power  will  be  exercised  properly  is  the 
code  of  honor  among  leading  financiers,  and  the  psychology 
of  the  most  influential  bankers.  It  is  true,  then,  that  the 
institutions   of   modern   banks   and   corporations   tend   to 


Money  and  Credit  441 

throw  a  concentrated  power  into  the  hands  of  the  men  who 
control  the  financial  machinery  of  the  country.  But  it  is 
equally  true  that  the  power  thus  created  has  been  in  the 
main  applied  to  industry  with  a  substantial  regard  for  the 
protection  of  investors,  the  growth  of  business,  and  the 
social  needs  of  the  country.  Undoubtedly  the  future  will 
see  a  greater  development  of  the  sense  of  social  obligation 
among  the  financiers,  and  will  see  credit  and  money  organ- 
ized in  ways  which  will  insure  larger  economic  service  to 
the  country. 

Psychological  Foundations  of  the  Credit  System 

The  central  functions  of  the  credit  system  depend  at 
every  point  upon  psychological  factors,  and  it  is  indispen- 
sable for  an  adequate  conception  of  financial  institutions  to 
consider  the  intangible  mental  and  emotional  elements 
which  are  everywhere  exerting  the  profoundest  influences. 
The  phase  of  psychological  forces  which  is  most  conspicuous 
in  financial  phenomena  is  commonly  called  business  confi- 
dence. Anyone  who  might  start  out  in  search  for  a  pivotal 
psychological  fact  about  which  swings  the  great  wheel  of 
all  economic  and  financial  activity  would  need  to  direct  his 
search  toward  the  confidence  of  the  average  business  man 
that  property  will  be  safe,  that  debts  will  be  paid,  that 
loans  can  be  made,  that  investors  will  be  protected.  A  con- 
fidence of  this  sort  is  not  a  tangible  thing ;  it  exists  only  in 
the  minds  of  men.  But  take  away  this  confidence  in  each 
man 's  mind  that  other  men  will  behave  in  certain  ways,  and 
one  has  taken  away  the  very  heart  of  that  mutual  and  tacit 
understanding  which  is  the  starting  point  of  business  calcu- 
lations. As  one  writer  has  declared,  ''The  greatest  instru- 
ment of  production — the  thing  that  really  produces  modern 
wealth — is  not  physical  things,  is  not  labor,  is  not  manage- 
ment; it  is  confidence  in  the  future,  it  is  a  credit  system 
based  on  the  expectation  of  industrial  continuity — an  ex- 
pectation that  debts  will  be  paid."^ 

A  large  element  in  business  confidence  is  the  rational 
calculation  of  the  business  community.     A  knowledge  of 

1  J.  R.  Commons,  "Trade  Unionism  and  Labor  Problems,"  p.  8. 


442  Money  and  Credit 

the  technique  of  credit,  money  and  banking  gives  an  under- 
standing of  the  manner  in  which  men  customarily  use  the 
technique  and  the  results  in  terms  of  gain  or  loss.  An  ade- 
quate fund  of  information  on  the  statistics  of  trade  and 
finance  in  general  and  of  those  individual  concerns  in  par- 
ticular with  whom  each  business  man  has  business  con- 
tracts is  a  necessary  foundation  for  all  confident  expecta- 
tions of  safe  and  profitable  business  dealings.  A  cool, 
analytical  judgment  of  the  honesty,  ability  and  eccentrici- 
ties of  business  associates  and  business  rivals  is  requisite 
for  intelligent  confidence  in  the  outcome  of  relations  with 
them.  Bankers  must  constantly  attempt  to  know  accurately 
the  amount  of  trust  which  borrowers  deserve  and  sellers 
must  estimate  accurately  the  buyers  whom  they  can  trust 
to  pay  on  time.  The  present  and  future  value  of  stocks 
and  bonds  must  be  measured  by  technical  analysis  and  such 
measurements  become  the  basis  for  the  confidence  of  in- 
vestors who  desire  to  place  their  money  in  securities  and  for 
the  confidence  of  bankers  who  desire  to  make  loans  with  the 
stocks  and  bonds  as  collateral  security.  "Without  a  real 
degree  of  faith  in  the  successful  outcome  of  business  adven- 
tures, practically  no  adventures  would  be  undertaken.  It 
is  the  feeling  of  assurance  that  business  affairs  will  run  in 
certain  channels,  and  that  business  men  will  behave  in 
certain  ways,  which  makes  possible  at  the  outset  the  busi- 
ness undertakings,  great  and  small,  of  the  whole  price 
system.  And  this  feeling  of  assurance,  this  strong  con- 
fidence in  the  safety  of  investments,  the  profitability  of 
enterprise,  and  the  repayment  of  loans  originates  in  large 
measure  from  the  rational  powers  of  bankers  and  business 
men.  It  is  critical  analysis  which  convinces  financiers  of 
all  descriptions  that  they  have  a  reasonable  hope  of  success 
in  their  undertakings.  When  critical  analysis  indicates 
that  the  institutions  of  finance  and  industry  are  nearing  a 
depression,  business  confidence  weakens  seriously;  and 
when  it  indicates  an  approaching  period  of  high  prosperity 
business  confidence  becomes  irresistible. 

Critical  reasoning  and  analytical  judgment  are  not,  how- 
ever, the  only  elements  in  business  confidence,  and  indeed 


Money  and  Credit  443 

even  the  best  judgment  of  business  men  is  subject  to  pro- 
found influences  from  instinctive  forces  of  which  their 
minds  are  but  vaguely  conscious.  Probably  no  instinctive 
forces  are  more  influential  in  swaying  the  most  careful  and 
sagacious  judgments  of  financiers  and  business  men  than 
those  centering  about  the  instinct  of  the  herd  and  the  emo- 
tions and  impulses  of  crowd  behavior.  Shortly  before  the 
outbreak  of  the  World  War  in  1914,  the  cry  went  up  from 
financial  circles  that  a  panic  was  imminent  because  of  cer- 
tain economic  policies  of  the  National  Government.  Presi- 
dent Wilson  declared  that  in  actual  fact  no  extreme  depres- 
sion of  business  existed,  but,  he  explained,  certain  financial 
interests,  by  their  doleful  warnings  and  prophesies,  were 
bringing  about  a  "psychological  panic."  Even  though  it 
be  granted  that  business  was  not  satisfactorily  prosperous 
at  the  time,  it  was  obvious  that  there  was  a  large  element 
of  truth  in  the  phrase  "a  psychological  panic."  In  other 
words,  the  pessimism  of  financial  leaders,  when  spread 
broadcast,  was  capable  of  making  the  mass  of  financiers 
think  that  things  were  worse  than  they  really  were,  and  of 
disseminating  a  panicky  feeling  throughout  the  groups  inti- 
mately connected  with  the  financiers.  The  herd  instinct 
expressed  itself  among  the  financial  groups  in  ways  which 
are  familiar  under  such  terms  as  contagion,  suggestion,  or 
imitation.  The  greatest  financiers  are  primary  centers  of 
suggestion.  Hence,  the  warnings  and  counsels  of  these 
towering  figures  spread  a  feeling  of  firmness,  or  uneasiness, 
as  the  case  may  be,  through  the  financial  community.  Very 
wealthy  men,  presidents  of  leading  banks  or  industrial  cor- 
porations, government  officials,  experts  on  the  statistics  of 
finance  or  trade,  exercise  a  contagious  influence  over  the 
judgments  of  the  financial  crowd.  When  they  feel  pessi- 
mistic, the  bulk  of  financiers  follow  suit;  when  they  feel 
optimistic,  that  is  the  clue  for  the  rest  to  follow.  In  the 
life  of  the  herd,  leadership  is  a  central  force,  and  in  the 
life  of  the  financial  community  financial  leadership  deter- 
mines the  tone  of  credit,  the  degree  of  confidence,  the  degree 
of  faith  or  fear  for  the  future  which  predominates. 

The  mental  life  of  the  financial  crowd  is  particularly 


444  Money  and  Credit 

susceptible  to  the  emotion  of  fear.  The  terrific,  driving 
energy  of  fear,  its  primitive  intensity  and  its  domination  of 
the  whole  human  being  when  excited  to  its  higher  pitches, 
find  a  full  expression  in  the  minds  of  financiers  as  a  group. 
Nowhere  is  this  power  of  fear  over  the  administrators  of 
the  credit  system  more  apparent  than  in  the  waves  of  busi- 
ness depression  and  prosperity,  in  the  mental  attitudes 
associated  with  business  cycles.  The  imminence  of  depres- 
sion strikes  the  fear  of  loss  or  even  of  bankruptcy  into  the 
hearts  of  business  men  with  great  force.  Each  man  strives 
to  save  himself  by  retrenchment,  or  liquidation,  or  rush 
sales,  or  shutdowns,  or  other  recourses,  and  the  very  fact 
that  each  man  is  told  that  everyone  else  is  in  the  same  state 
of  fear  raises  the  fear  and  pessimism  of  everyone  to  the 
greatest  heights.  When  the  instinctive  storm  has  spent 
itself,  and  the  group  mind  of  the  financial  community  has 
cleared  itself  of  the  sharp  excesses  of  fear,  other  instinctive 
energies  come  into  play,  and  exert  powerful  influences  over 
the  financial  mind.  In  prosperous  periods,  the  instincts  of 
acquisitiveness,  achievement,  power,  or  constructiveness  see 
almost  boundless  opportunities  for  successful  expression. 
Bankers  supply  business  men  with  the  credit  adequate  for 
huge  expansion  projects,  for  vast  extensions  of  business, 
for  speculative  undertakings,  until  great  numbers  of  them 
are  carried  away  by  their  splendid  optimism  to  all  sorts  of 
economic  excesses.  Their  minds  become  intoxicated  by 
their  emotions,  and  irrational  mental  judgments  lead  them 
into  the  danger  zones  of  economic  life.  It  is  not  meant  to 
imply  that  these  psychological  phenomena  are  unaccom- 
panied by  strenuous  use  of  the  rational  faculties,  nor  that 
they  have  no  foundation  in  the  facts  of  economic  produc- 
tion and  trade.  The  significance  of  the  account  here  given 
is  that  the  facts  of  trade  and  the  rule  of  reason  are  subject 
to  profound  instinctive  and  emotional  influences  at  every 
turn  of  financial  experience.  No  other  explanation  can  ac- 
count for  the  excessive  rush,  for  the  fear  stampede,  carried 
often  to  unnecessary  extremes,  toward  liquidation  on  the 
part  of  the  administrators  of  the  credit  system  during  the 
period  of  depression.     No  other  explanation  can  account 


Money  and  Credit  445 

for  the  extraordinary  credulity  of  these  same  men  in 
periods  of  great  prosperity  in  giving  themselves  up  to  over- 
expansion,  ruinous  borrowing  and  excessive  risk-taking. 
The  conclusion  is  therefore  warranted  that  the  irratioyial 
influences  upon  business  confidence  are  no  less  important 
and  powerful  than  the  rational  influences.^ 

The  keenly  felt  need  for  sound  foundations  of  business 
confidence  has  effected  among  the  banking  and  credit  fra- 
ternity extraordinarily  high  standards  of  probity,  integrity, 
reliability  and  honesty.  It  is  among  the  leaders  of  banking 
that  we  find  the  most  emphatic  insistence  upon  a  high  code 
of  business  morality.  Prominent  bankers  are  men  whose 
reputations  for  absolute  honesty  in  all  dealings  are  unques- 
tioned. They  judge  the  acceptability  of  clients  desiring  to 
borrow  money  in  very  large  measure  by  the  right  of  the 
clients  to  a  name  for  unimpeachable  integrity.  To  have 
one's  word  "as  good  as  gold;"  to  abide  unfailingly  by 
both  the  spirit  and  the  letter  of  contracts;  to  pay  debts 
promptly  and  undertake  no  obligations  which  cannot  be 
met  with  a  certainty;  to  represent  all  factors  in  business 
dealings  fairly  and  truthfully;  to  be  dependable  and  reli- 
able under  all  financial  responsibilities, — these  are  some  of 
the  articles  of  conduct  which  the  administrators  of  the 
credit  system  lay  down  as  minimum  and  irreducible  stand- 
ards. These  standards  are  plainly  indispensable  for  the 
maintenance  of  a  sound  business  confidence,  and  sound 
business  confidence  is  plainly  indispensable  for  the  main- 
tenance of  the  psychological  bonds  which  unite  all  the  ele- 

1  An  excellent  illustration  of  tliese  psychological  influences  is 
given  by  W.  P.  G.  Harding.  In  the  course  of  testimony  before  a 
Congressional  Committee  in  August,  1921,  he  was  quoted  as  saying, 
in  regard  to  the  contemporary  financial  depression:  "The  Federal 
Reserve  Board  did  not  create  this  financial  depression.  It  saw  it 
coming,  and  got  ready  to  protect  things,  and  people  ought  to  be 
grateful  it  did  so.  Now  all  we  need  is  cessation  of  pessimism,  which 
marks  bad  times  as  foolish  optimism  marks  good  times.  We  all 
know  now  everybody  was  going  crazy  in  the  boom  during  the  Fall 
of  1919.  .  .  .  All  we've  got  to  do  is  to  get  out  of  everlasting  pessi- 
mism and  quit  saying  everything  is  going  to  the  dogs.  Why,  a  man 
has  to  put  up  a  good,  cheerful  face  if  he  wants  credit.  You  can't 
talk  to  the  banker  like  you  do  to  the  tax  assessor." 


446  Money  and  Credit 

ments  of  money,  credit,  investment  and  banking  into  the 
price  system  of  the  present  economic  order. 

The  functions  of  business  confidence  should  be  further 
clarified  by  a  study  of  the  psychological  factors  involved 
in  saving,  thrift,  and  provision  for  the  future.  The  first 
prerequisite  to  saving  money  instead  of  spending  it  is  the 
confidence  that  the  savings  will  not  be  lost,  stolen,  dissi- 
pated or  confiscated.  If  the  man  who  is  thrifty  can  put  his 
savings  into  insurance  policies,  savings  banks,  or  stocks  and 
bonds,  with  the  reasonable  assurance  that  his  savings  will 
be  secure,  there  is  obtained  the  condition  which  encourages 
economy  and  provision  for  the  future.  Financial  confi- 
dence in  the  security  of  savings  is  thus  the  beginning  of 
thrift. 

Thrift  is,  in  turn,  indispensable  in  building  up  the 
gigantic  accumulations  of  capital  which  characterize  the 
corporation  of  to-day,  and  which  are  the  tangible  sources 
of  money  and  credit  transactions.  Perhaps  the  most  strik- 
ing feature  of  the  psychology  of  saving  is  the  fact  that  a 
more  equal  distribution  of  income  would  gravely  menace 
the  thrift  of  the  country.  As  J.  M.  Keynes  states,  "The 
new  rich  of  the  nineteenth  century  were  not  brought  up  to 
large  expenditures,  and  preferred  the  power  which  invest- 
ment gave*  them  to  the  pleasures  of  immediate  consumption. 
In  fact,  it  was  precisely  the  inequality  of  the  distribution 
of  wealth  which  made  possible  those  vast  accumulations  of 
fixed  wealth  and  of  capital  improvements  which  distin- 
guished that  age  from  all  others.  .  .  .  The  immense  accu- 
mulations of  fixed  capital  which,  to  the  great  benefit  of 
mankind,  were  built  up  during  the  half  century  before  the 
war,  could  never  have  come  about  in  a  society  where  wealth 
was  divided  equitably."^  The  mass  of  men  find  the  temp- 
tations to  satisfy  their  instincts  by  immediate  consumption 
so  forceful  and  irresistible  that  their  savings  are  relatively 
slight.  Of  course,  working  classes  with  low  incomes  would 
be  obliged  to  starve  some  of  their  most  urgent  instincts  if 
they  undertook  to  save  in  any  considerable  amounts.  Their 
incomes  are  often  too  limited  to  permit  of  any  material 
1  "The  Economic  Consequences  of  the  Peace,"  pp.  18-19. 


Money  and  Credit  447 

saving  except  by  excessive  self-stinting  on  the  necessaries 
of  life.  But  when  working-class  incomes  rise  above  the 
line  of  minimum  subsistence,  there  is  no  assurance  that  a 
proper  share  of  the  income  will  be  saved.  As  a  usual  mat- 
ter, the  worker  lives  up  to  his  income.  Any  increase  in  the 
share  of  wealth  distributed  to  the  working  classes  must, 
therefore,  be  surrounded  with  education  in  thrift,  with 
facilities  for  placing  savings  where  they  will  be  safe  and 
will  draw  some  interest.  In  short,  a  more  equitable  distri- 
bution of  wealth  would  necessitate  a  constructive  move  to 
insure  that  enough  wealth  would  be  saved  to  guarantee 
adequate  capital  accumulation  in  the  future. 

The  paramount  motive  to  saving  among  the  classes  with 
low  income  is  the  parental  motive.  Alfred  Marshall  has 
made  clear  ''that  men  labor  and  save  chiefly  for  the  sake 
of  their  families."^  But  not  even  family  foresight  can. 
make  large  savings  from  small  income.  It  is  estimated  that 
the  total  savings  of  the  working  classes  amount  to  barely 
one-tenth  of  the  full  volume  of  savings  of  the  country. 
Higher  interest  rates  cannot  be  expected  materially  to  in- 
crease the  savings  of  these  low  income  classes,  because  the 
instinctive  pressure  for  immediate  gratification  of  urgent 
wants  eats  up  the  great  bulk  of  their  income.^ 

Saving  among  the  so-called  middle  classes  is  prompted 
by  a  variety  of  psychological  forces.  Family  provision  for 
the  future  is  an  important  motive  to  middle-class  thrift. 
The  accumulation  of  that  amount  of  wealth  which  will  put 
a  person  into  the  higher  social  circles,  with  accompanying 
prestige  and  display,  is  another  powerful  motive  to  middle- 
class  saving.  Middle-class  professional  and  business  men 
are  accustomed  to  save  and  reinvest  in  their  professional 
or  business  interests,  and  these  "men  on  the  make"  thereby 
associate  with  saving  all  those  instincts  which  underlie  their 
basic  ambitions  in  life.  Interest  rates  are  usually  minor 
considerations  in  middle-class  saving.  "It  is  probably  safe 
to  say  that  if  they  cannot  get  a  higher  rate  of  interest  they 

1  "Principles  of  Economics,"  p.  228. 

2  A.  B.  Wolfe,  Quarterly  Journal  of  Economics,  Vol.  XXXV,  p.  23. 


448  Money  and  Credit 

will  taKe  a  low,  without  greatly  reducing  their  savings."^ 
Saving  by  either  the  low  income  classes  or  the  middle 
classes  usually  entails  considerable  sacrifice,  some  actual 
abstinence,  often  real  privation.  The  saving  of  both  these 
classes  has  lately  come  to  attract  the  attention  of  bankers, 
economists  and  public  leaders  generally,  and  the  doctrine 
has  been  widely  preached  that  saving  is  a  virtue  of  the 
finest  sort,  and  that  extravagant  spending  for  immediate 
consumption  is  vicious  and  dangerous  for  general  economic 
progress.  Thrift  therefore  is  preached  almost  as  a  religion 
and  is  associated  with  emotions  of  patriotism.  Undoubt- 
edly, it  is  of  the  utmost  importance  to  coach  these  classes  to 
the  maximum  of  saving  consistent  with  the  reasonable  en- 
joyment of  immediate  necessities  and  comforts,  and  the 
folk  psychology  of  the  future  will  need  to  be  carefully 
developed  in  ways  which  will  build  up  habits,  customs, 
ideals  and  institutions  favorable  to  thrift  among  the  masses 
of  people. 

In  the  matter  of  saving,  the  force  of  imitation  very  com- 
monly works  to  an  undesired  end.  People  of  low  incomes 
delight  to  imitate  many  of  the  forms  of  expenditure  of  the 
well-to-do.  The  people  of  financial  prestige,  with  automo- 
biles, silks,  Victrolas,  vacations,  etc.,  set  a  pace  which  en- 
courages imitation,  and  in  the  face  of  the  desire  of  the 
common  man  to  imitate  the  expenditures  of  the  well-to-do, 
the  preaching  of  thrift  as  a  religious  virtue  and  economic 
necessity  has  often  discouraging  effects.  This  is  especially 
true  because  it  is  felt  that  saving  among  the  well-to-do  does 
not  require  sacrifice  or  abstinence.  To  all  appearances 
they  still  enjoy  huge  immediate  consumption,  and  their 
saving  can  scarcely  be  made  to  look  like  a  deliberate  virtue. 
"The  higher  income  classes — say  of  over  $50,000 — save 
mechanicallj'-,  with  little  or  no  sacrifice  of  present  wants. '  '^ 
The  savings  of  these  classes  are  made  in  large  measure  re- 
gardless of  interest  rates.  But  the  fact  remains  that  the 
savings  of  these  classes  are  made,  and  are  enormous  in  their 
totals.    Their  larger  savings  are  not  due  commonly  to  any 

1  A.  B.  Wolfe,  Quarterly  Journal  of  Econonncs,  Vol.  XXXV,  p.  23. 
ilhid.,  p.  23. 


Money  and  Credit  449 

superior  virtues  of  thrift,  but  to  the  ease  of  saving  out  of 
a  large  income.  With  the  development  of  the  modern 
financial  system,  corporate  industry  has  come  to  distrust 
the  adequacy  of  any  of  these  sources  of  saving.  All  told, 
they  would  not  provide  the  needed  capital  accumulation. 
Corporations  rely  upon  two  other  sources  for  capital, — 
namely,  undistributed  profits  and  bank  loans.  To  quote 
T.  S.  Adams,  "A  large  part  of  the  annual  harvest  of  thrift, 
perhaps  the  largest  part,  consists  of  profits  earned  by  busi- 
ness concerns  and  turned  immediately  back  into  business 
or  reinvestment  in  related  kinds  of  productive  activity."^ 
To  take  an  illustration,  in  the  slightly  more  than  fifty  years 
of  existence  of  Armour  and  Company,  total  earnings  of 
about  $140,000,000  have  been  turned  back  into  the  business, 
whereas  only  about  $30,000,000  have  been  paid  out  in  divi- 
dends. Over  90  per  cent,  of  the  present  net  worth  of 
Armour  and  Company  has  come  from  the  reinvestment  of 
this  surplus,  the  small  balance  has  come  from  cash  and 
stockholders'  savings.  Not  all  companies  have  gone  as  far 
with  the  practice  as  this  particular  company,  but  it  is 
nevertheless  a  commonly  accepted  business  policy  of  the 
present  day,  and  a  main  reliance  of  corporations  in  secur- 
ing capital.^  Because  of  this  policy,  the  conclusion  is 
drawn  by  David  Friday  that  "other  things  being  equal, 
capital  accumulation  is  likely  to  be  largest  when  the  share 
which  goes  to  profits  is  large.  The  organization  of  our 
industry  under  the  corporate  form  and  the  principles  of 
financial  management  which  dominate  the  corporate  insti- 
tution inevitably  work  to  that  end. '  '^ 

The  other  source  of  capital  accumulation,  bank  loans  for 
fixed  capital,  overlaps  in  many  ways  the  sources  which  have 
already  been  mentioned,  but  in  a  substantial  degree  repre- 
sents a  distinctly  additional  source  of  capital  funds.  The 
estimates  made  by  H.  G.  Moulton  indicate  that  in  the  year 
1916  the  amount  of  bank  loans  used  for  these  purposes  was 
about  $9,000,000,000.*     The  steady  flow  of  capital  savings 

'^American  Economic  Revieio  Supplement,  March,  1915,  p.  239. 

2  See  A.  S.  Johnson,  Mew  Republic,  Volume  23,  pp.  279-281. 

3  "Profits,  Wages  and  Prices,"  p.  97. 

*  Journal  of  Volitical  Economy,  Vol.  2G,  pp.  638-603. 


450  Money  and  Credit 

is  therefore  not  dependent  merely  upon  the  voluntary  thrift 
of  individuals,  but  rests  largely  upon  organized  capital 
accumulation  by  corporations  and  banks  directly.  Any 
development  of  economic  life  in  the  direction  of  a  wider 
diffusion  of  income  must  safeguard  itself  against  the  danger 
of  reducing  the  annual  fund  of  savings.  Individual 
economy,  even  under  the  present  system  of  highly  unequal 
incomes,  is  not  adequate  to  provide  enough  savings.  The 
psychology  of  thrift  must  be  definitely  expanded,  and  the 
motives  to  saving  must  be  thoroughly  encouraged  and  sus- 
tained by  new  traditions,  habits  and  policies  of  the  financial 
institutions  themselves.  Such  a  psychological  development 
must  be  looked  for  mainly  outside  of  the  acquisitive  in- 
stincts and  the  interest  rate.  A  recent  writer  declares  his 
general  experience  in  the  following  words:  "That  savings 
are  prompted  in  practically  all  cases  by  reasons  other  than 
the  rate  of  interest  is  the  general  belief  of  bankers.^ 

The  fact  that  the  foundations  of  the  institutions  of  credit 
and  finance  cannot  be  understood  apart  from  their  psycho- 
logical aspects  needs  no  further  details  of  explanation. 
Both  the  functions  and  the  dangers  of  the  credit  system 
trace  their  origins  back  to  the  instinctive  and  rational  ten- 
dencies of  business  men.  The  great  rational  faculties  of 
successful  financiers;  the  omnipresent  irrational  and  semi- 
rational  influences  upon  the  mind  of  the  financial  com- 
munity; the  standards  of  honor  which  are  held  up  by  the 
administrators  of  the  credit  system;  the  organization  of 
incentives  to  capital  saving,  investment  and  accumulation, — 
these  factors  shape  the  construction  of  business  confidence, 
and  the  psychological  foundations  of  the  price  system. 

iL.  D.  Woodworth,  Economic  World,  Jan.  22,  1921,  p.  118. 


Money  and  Credit  451 


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and  Banking;  Commercial  Banking  and  Capital  Formation, 
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Marshall  and  Lyon:  Our  Economic  Organization,  Chapters 
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Mead,  E.  S.:  Corporation  Finance 

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Brandeis:  Other  People's  Money  and  How  the  Bankers  Use  It 

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Burton:  Crises  and  Depressions 

Fisher,  I.:  Stabilizing  the  Dollar;  Purchasing  Power  of  Money 

Hawtrey,  R.  G.  :  Currency  and  Credit 

Kemmerer,  E.  W.:  The  A  B  C  of  the  Federal  Reserve  System 

Willis,  H.  P.:  The  Federal  Reserve;  American  Banking 

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Kirkbride  and  Sterrett  :  Modern  Trust  Company 

Chamberlain:  Principles  of  Bond  Investment 

Taylor:  The  Credit  System 

Wolff:   Co-operative  Credit  in  the  United  States 

Withers,  Hartley:  War-Time  Financial  Problems;  Interna- 
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Hollander:   War  Borrowing 

Laughlin,  J.  H. :  Banking  Progress;  Money  and  Prices 

HoLDSWORTH,  J,  T. :   Money  and  Banking 

Scott,  W.  A.:  Money  and  Banking 

White,  H.:  Money  and  Banking 

FiSKE,  A.  K.:  The  Modern  Bank 

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Mill,  John  S.:  Political  Economy 

Taussig,  F.  M.:  German  Reparation  Payments,  American  Eco- 
nomic Review,  Dec,  1919,  p.  33 


452  Money  and  Credit 

ViNER,  J.:  V/ho  Paid  for  the  War? — Journal  of  Political 
Economy,  Jan.,  1920,  p.  46 

Miller,  A.  C. :  Federal  Reserve  System,  American  Economic 
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Stewart,  W.  W.  :  Index  of  Production,  American  Economic 
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Sprague,  0.  M.  W. :  Discount  Policy  of  Federal  Reserve  Banks, 
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Friedman,  E.:   International  Finance  and  Its  Reorganization 


PART  III 
ECONOMIC   ADAPTATION 


CHAPTER  XI 

PUBLIC    CONTROL 

Economic  problems  form  part  of  the  subject-matter  of 
economic  science,  and  questions  of  progress,  of  improve- 
ment, of  reconstruction,  command  painstaking  thought. 
All  problems  of  economic  improvement  are  fundamentally- 
two-sided  ;  on  the  one  hand,  they  necessitate  the  alteration 
of  institutions  the  better  to  fit  human  nature;  and  on  the 
other  hand,  they  necessitate  the  discipline  and  education  of 
human  nature  the  better  to  fit  institutions.  The  solution 
of  economic  problems  requires  a  blending  of  human  nature 
and  economic  institutions.  Economic  progress  involves 
always  the  basic  element  of  adaptation  between  two  prime 
factors,  men  and  institutions.  W.  E.  Hocking  refers  to 
man  as  "the  only  animal  that  deliberately  undertakes, 
while  reshaping  his  outer  world,  to  reshape  himself  also." 
The  human  equipment  needs  discipline  and  guidance  in 
ways  which  are  not  degrading  or  weakening,  and  needs 
opportunities  for  expression  in  ways  which  represent  a  ful- 
filment of  the  primary  human  instincts  and  desires,  and 
which  are  safe  for  society.  At  the  same  time,  institutions 
need  to  be  made  to  function  in  such  ways  that  human 
nature  will  be  neither  outraged  nor  pampered,  but  will  be 
evoked,  expressed  and  satisfied  within  social  bounds. 

Every  student  comes  to  economic  discussions  with  certain 
first  principles  which  give  him  his  orientation  for  economic 
thinking.  It  is  these  first  principles,  these  elementary  con- 
ceptions mostly  born  of  family  and  social  traditions,  which 

453 


454  Public  Control 

need  scientific  examination.  As  Justice  Holmes  profoundly 
observes,  "To  have  doubted  one's  first  principles  is  the 
mark  of  a  civilized  man."  The  first  principles  of  the  pro- 
gressive and  of  the  conservative  differ  deeply,  and  in  no 
way  more  fundamentally  than  in  this  respect :  the  conserva- 
tive-minded thinker  inclines  to  give  present-day  institutions 
the  benefit  of  all  doubts  and  to  assume  that  liberals  or 
radicals,  mild  or  extreme,  need  discipline  to  make  them 
conform;  whereas  the  progressive  thinker  inclines  to  give 
human  nature  the  benefit  of  all  doubts  and  to  assume  that 
conservatives  or  reactionaries  need  to  be  forced  to  reshape 
institutions  so  that  human  nature  can  be  freer  to  follow 
its  own  bent.  Conservatives  tend  to  believe  that  human 
nature  is  wrong  when  it  is  unruly  or  dissatisfied ;  progres- 
sives tend  to  believe  that  laws,  organizations,  systems,  in- 
stitutions, are  wrong  when  men  become  impatient  with 
them.  One  wishes  to  reshape  human  nature  by  new  dis- 
ciplines ;  the  other  to  reshape  institutions  by  reconstruction. 
Economic  adaptation  between  these  two  factors  may,  of 
course,  come  about  in  many  ways, — by  mere  chance,  by 
blind  drifting,  by  coercion,  by  pacifistic  surrender,  by  co- 
operation, by  rebellion,  by  intelligent  planning.  The  eco- 
nomic order  is  to-day  so  stupendous  in  its  proportions  that 
individual  thinkers  all  too  often  look  upon  the  course  of 
adaptation  with  a  fatalistic  despair,  and  resign  themselves 
to  the  inevitability  and  inescapability  of  economic  evolu- 
tion with  an  optimistic  delusion  that  all  will  turn  out  for 
the  best  some  day  anyhow.  Such  attitudes  lie  behind  the 
frequent  blunders  and  futilities  in  modem  economic  ad- 
justments. Economic  thinking  worthy  of  the  name  must 
come  within  the  scope  of  the  points  of  view  and  mental 
processes  which  are  insisted  upon  by  the  reconstructed 
philosophy  of  recent  years, — it  must  be  devoted  to  creative 
adaptation.  Adaptation  which  is  safe  and  trustworthy  is 
an  act  of  will,  based  upon  an  intelligent  analysis  of  facts. 
It  comes  from  "creative  intelligence."  To  effect  a  decent 
balance  in  reshaping  human  conduct  and  in  reshaping  eco- 
nomic institutions  calls  for  the  most  elaborate  scientific 
investigations  to  ascertain  facts  and  methods,  for  experi- 


Public  Control  455 

mentation  with  alternative  courses  of  economic  policy,  for 
unlimited  research  by  private  experts  and  public  commis- 
sions, for  the  invention  of  theories  and  hypotheses  to  be 
tried  out  and  proved  or  disproved,  for  the  creation  of  new- 
principles  of  human  behavior,  for  the  discovery  of  new 
ideas  bearing  upon  pressing  economic  problems.  Adapta- 
tion which  is  sound  and  wise  has  to  be  wrought  out  by  the 
deliberate  effort  of  creative  minds.  Adaptation  involves  a 
technique  of  inquiry,  research,  experimentation,  scientific 
guessing,  reflection,  observation,  analysis,  diagnosis,  infer- 
ence, hypothesis,  testing,  and  verification.  In  modern  so- 
ciety there  are  specialists  and  experts,  responsible  leaders, 
who  are  adepts  in  the  use  of  this  technique,  or  should  be, 
and  upon  them  naturally  falls  the  burden  of  formulating 
the  lines  of  economic  adjustment  in  their  broadest  and 
deepest  aspects.  But  any  over-reaching  in  the  direction  of 
specialization,  on  the  assumption  that  one  class  in  society 
should  do  all  the  planning,  and  another  class  all  the  hand- 
work and  none  of  the  planning,  would  be  dangerous.  In 
his  own  individual  way  and  within  the  limit  of  his  powers, 
every  man  deserves  the  responsibility  of  planning,  suggCot- 
ing,  imagining,  and  few  indeed  are  the  members  of  society 
who,  under  proper  encouragement,  lack  that  spark  of  curi- 
osity which  seeks  satisfaction  in  ideas,  plans,  and  sugges- 
tions. The  caliber  of  the  average  individual  will  be  meas- 
ured by  the  degree  to  which  the  latent  powers  of  his  human 
equipment  are  called  into  creative  use.  If  he  is  a  thing 
accustomed  to  act  always  under  orders,  a  being  whose 
thinking  is  done  by  specialists  only,  his  human  equipment 
is  bankrupt  in  regard  to  those  qualities  of  personality 
which  can  arise  only  from  self-expression  and  self-asser- 
tion. So  in  his  individual  manner  each  person  in  economic 
society  must  be  somewhat  creative  and  original  and  curious 
if  he  is  to  be  the  best  possible  member  of  society. 

If  the  mass  of  individuals  are  to  have  originality  and 
creative  ability,  each  individual  must  be  encouraged  to 
make  wise  new  adaptations  to  his  immediate  environment 
every  day  of  his  life.  Obedience  and  unquestioning  con- 
formity is  not  the  first  law  of  life,  but  rather  the  first  law 


456  Public  Control 

of  life  is  individual  creative  adaptation.  The  man  must 
be  free  and  able  to  plan  improvements  in  the  system  under 
which  he  moves  and  works,  and  he  must  be  constrained  to 
that  measure  of  self-control  and  self-direction  which  is 
necessary  to  keep  him  in  tune  with  his  immediate  universe. 
The  words  of  John  Dewey  on  this  matter  are  deeply  sug- 
gestive: "The  best  guarantee  of  collective  efficiency  and 
power  is  liberation  and  use  of  the  diversity  of  individual 
capacities  in  initiative,  planning,  foresight,  vigor  and  en- 
durance. Personality  must  be  educated,  and  personality 
cannot  be  educated  by  confining  its  operations  to  technical 
and  specialized  things,  or  to  the  less  important  relation- 
ships of  life.  Full  education  comes  only  when  there  is  a 
responsible  share  on  the  part  of  each  person,  in  proportion 
to  capacity,  in  shaping  the  aims  and  policies  of  the  social 
groups  to  which  he  belongs.  This  fact  fixes  the  significance 
of  democracy.  .  .  .  Human  nature  is  developed  only  when 
its  elements  take  part  in  directing  things  which  are  com- 
mon, things  for  the  sake  of  which  men  and  women  form 
groups  —  families,  industrial  companies,  governments, 
churches,  scientific  associations  and  so  on.  .  .  .  When  the 
liberating  of  human  capacity  operates  as  a  socially  creative 
force  .  .  .  making  a  living,  economically  speaking,  will  be 
at  one  with  making  a  life  that  is  worth  living."^ 

As  soon  as  the  average  person  comes  face  to  face  with 
this  attitude  toward  economic  problems,  he  naturally  in- 
quires: What  is  your  solution?  What  is  the  remedy  for 
the  difficulties  of  the  economic  order?  What  is  your 
answer  to  the  multitude  of  economic  questions  which  arise 
on  every  hand  ?  This  kind  of  inquiry  is  usual  and  natural. 
Men  are  in  search  of  an  ultimate  solution  for  the  whole 
thing.  They  suppose  that  of  course  each  man  ought  to 
have  a  theory  about  the  way  out  of  all  troubles.  Then  he 
could  say  to  everybody,  Now  if  only  you  would  adopt  this 
scheme,  all  would  be  well.  If  only  you  would  put  this 
solution  into  practice,  nothing  else  would  be  necessary. 
And  the  only  trouble  with  such  ultimate  solutions  is  that 
people  simply  do  not  adopt  them.  Just  that  is  the  futility 
1  "Reconstruction  of  Philosophy,"  pp.  209-211. 


Public  Control  457 

of  these  single  ultimate  remedies  based  upon  an  "if  only. ' ' 
They  assume  a  human  behavior  which  is  contrary  to  fact. 
It  might  as  well  be  put  bluntly  and  boldly  that  there  is  no 
one  simple  solution,  and  those  people  who  pretend  to  have 
one  are  obliged  to  live  in  an  imaginary  world  where  every- 
thing would  be  all  right  if  only  people  would  not  do  the 
things  which  people  do  and  if  only  men  would  behave  in 
those  ways  in  which  they  won't  behave.  Realists  who  are 
willing  to  deal  with  actual  human  nature  and  actual  insti- 
tutions find  that  we  are  confronted  with  a  great  bundle  of 
economic  problems,  and  bundles  within  the  bundle,  and 
bundles  within  the  bundles.  Each  requires  investigation, 
inference,  experimentation  and  creative  imagination. 
Problems  of  co-ordination  and  correlation  between  all  the 
bundles  of  problems  will  come  to  the  front.  The  world  of 
economic  problems  is  teeming  with  infinite  diversity,  pecu- 
liarity, individuality,  variety,  and  the  realistic  mind  seeks 
to  adapt  each  to  each  and  each  to  all.  This  attitude  always 
is  a  disappointment  to  many  minds,  because  it  gives  no 
rock  of  ages  to  step  foot  upon,  but  instead  makes  every 
man  an  explorer,  a  pathfinder,  a  trail  blazer,  a  discoverer. 
If  it  has  less  certitude,  it  at  least  has  infinitely  more  prac- 
ticality. The  specific  implications  of  this  attitude  are  so 
ably  stated  by  Dewey  that  it  is  well  to  quote  him  again : 
"Just  what  response  does  this  social  arrangement,  political 
or  economic,  evoke,  and  what  effect  does  it  have  upon  the 
disposition  of  those  who  engage  in  it?  Does  it  release  ca- 
pacity? If  so,  how  widely?  Among  a  few,  with  a  corre- 
sponding depression  in  others,  or  in  an  extensive  and 
equitable  way?  Is  the  capacity  which  is  set  free  also  di- 
rected in  some  coherent  way,  so  that  it  becomes  a  power, 
or  are  its  manifestations  spasmodic  and  capricious?  Since 
responses  are  of  an  indefinite  diversity  of  mind,  these  in- 
quiries have  to  be  detailed  and  specific.  Are  men 's  senses 
rendered  more  delicately  sensitive  and  appreciative,  or  are 
they  blunted  and  dulled  by  this  and  that  form  of  social 
organization?  Are  their  minds  trained  so  that  the  hands 
are  more  deft  and  cunning?  Is  curiosity  awakened  or 
blunted  ?    What  is  its  quality :    Is  it  merely  esthetic,  dwell- 


458  Public  Control 

ing  on  the  forms  and  surfaces  of  things,  or  is  it  also  an 
intellectual  searching  into  their  meaning?  .  .  .  What  is 
needed  is  specific  inquiries  into  a  multitude  of  specific 
structures  and  interactions."^ 

A  convenient  classification  for  the  purpose  of  helping  in 
understanding  tlie  main  directions  of  economic  adaptation 
will  be  made  under  the  three  headings:  Public  Control, 
Radicalism,  Economic  Democracy. 

Public  Control 

The  major  economic  problems,  almost  without  exception, 
exhibit  phases  which  refer  to  some  form  or  degree  of  gov- 
ernment control,  and  the  major  policies  of  modern  govern- 
ment almost  without  exception  exhibit  phases  which  refer 
to  economic  conditions.  So  politics  abounds  with  economics 
and  economics  abounds  with  politics.  The  extent  to  which 
government  should  interfere  in  business  is  often  a  matter 
of  bitter  debate,  and  each  separate  problem  has  to  be  dis- 
posed of  on  its  own  merits.  Those  economists  who  are  not 
averse  to  a  liberal  measure  of  governmental  control  look 
upon  government  policies  not  primarily  as  an  interference 
with  business  conditions,  but  rather  as  a  means  of  smooth- 
ing out  troubles  and  injuries  arising  from  unrestrained 
business  adventures,  and  as  a  means  of  aiding  and  guiding 
business  toward  higher  standards.  The  function  of  govern- 
ment is  not  to  meddle  and  intrude  where  it  is  not  needed, 
but  is  to  co-operate  and  constrain  and  direct  and  recon- 
struct where  economic  conditions  fail  to  right  themselves. 
Referring  to  this  positive  responsibility  of  government,  a 
thoughtful  political  scientist  has  commented,  "The  most 
striking  change  in  the  political  organization  of  the  last  half 
century  is  the  rapidity  with  which,  by  the  sheer  pressure 
of  events,  the  state  has  been  driven  to  assume  a  positive 
character.  .  .  .  And,  in  the  main,  it  is  reasonably  clear 
that  political  good  is  to-day  for  the  most  part  defined  in 
economic  terms.  "^ 

Since  the  World  War,  the  people  of  the  United  States 

1  "Reconstruction  of  Philosophy,"  pp.   197-198. 

2  H.  J.  Laski,  "Authority  in  tlie  Modern  State."  pp.  81,  98. 


Public  Control  459 

have  undergone  a  marked  reaction  away  from  the  extreme 
forms  of  government  control  of  economic  affairs.  The  reac- 
tion is  well  defined  in  a  catch  phrase  which  has  won  wide 
currency, — less  government  in  business  and  more  business 
in  government.  The  war  emergency  brought  the  basic 
economic  activities  of  the  country  under  close  government 
supervision.  The  Federal  Government  assumed  control  of 
the  economic  life  of  the  nation  through  a  vast  administra- 
tive machinery:  The  Food  Administration  to  conserve  the 
supply  of  foods,  restrain  prices,  and  distribute  the  supply 
where  most  needed ;  the  Fuel  Administration  to  control 
prices  of  fuel,  and  regulate  priorities  in  its  use ;  the  Rail- 
road Administration  to  operate,  co-ordinate  and  unify  the 
transportation  facilities  of  the  country;  the  President's 
Mediation  Commission,  the  National  War  Labor  Board,  the 
"War  Labor  Policies  Board,  and  other  special  boards,  to 
arbitrate  labor  disputes,  establish  industrial  standards, 
adjust  wages,  and  secure  maximum  labor  efficiency;  the 
United  States  Shipping  Board  and  the  Emergency  Fleet 
Corporation  to  construct  ships  rapidly,  control  ships  seized 
from  the  enemy,  and  to  mobilize  and  direct  shipping  forces 
of  the  nation;  the  War  Trade  Board  and  the  War  Trade 
Council  to  regulate  exports  and  imports,  and  to  apprehend 
efforts  at  trading  with  the  enemy;  the  War  Finance  Cor- 
poration and  Capital  Issues  Committee  to  conserve  the 
credit  resources  of  the  country  for  industries  essential  to 
winning  the  war;  the  War  Industries  Board  to  organize 
the  industrial  resources  of  the  country  for  essential  war 
purposes;  and  other  special  boards  to  handle  war  publicity, 
stimulate  science  and  invention,  investigate  and  control 
enemy  aliens  and  their  property,  construct  aircraft,  and 
direct  war-risk  insurance.  Most  of  the  war  boards  made 
large  use  of  the  practice  of  licensing  corporations  as  a 
means  of  controlling  their  conduct.  Price-fixing,  household 
thrift,  priorities,  and  other  means  of  enforcing  war  poli- 
cies brought  the  great  bulk  of  the  economic  life  of  the 
country  under  the  War  Administration. 

The  extreme  extent  of  this  war  control  placed  the  busi- 
ness of  the  country  in  a  position  where  its  freedom  of 


460  Public  Control 

initiative  and  its  independent  judgment  were  drastically- 
curbed.  Although  the  business  interests  were  as  a  rule 
patriotic  and  willing  to  submit  to  superior  direction  while 
submission  was  necessary  to  win  the  war,  nevertheless  the 
surrender  of  their  freedom  to  conduct  their  private  busi- 
nesses was  not  a  pleasant  experience,  and  the  minute  the 
war  was  over  business  men  were  straining  at  the  leash  for 
escape  from  the  rigid  restraints  of  war  days.  The  Presi- 
dent reflected  the  predominating  sentiment  of  the  country 
when,  shortly  after  the  armistice  was  signed,  he  declared  in 
a  message  to  Congress,  "While  the  war  lasted  ...  we  put 
every  material  energy  of  the  country  in  harness  to  draw 
the  common  load  and  make  of  us  one  team  in  the  accom- 
plishment of  a  great  task.  But  the  moment  we  knew  the 
armistice  to  have  been  signed  we  took  the  harness  off." 
The  war  brought  the  most  comprehensive  organization  of 
economic  life  that  Americans  had  ever  witnessed,  and  the 
restraint  and  subordination  which  it  involved  were  repug- 
nant to  the  American  spirit  of  free  initiative  and  inde- 
pendence of  action.  The  American  people  knew,  in  no 
doubtful  mind,  that  they  did  not  desire  so  far-reaching  and 
inclusive  regulation  of  their  economic  life.  On  the  whole, 
the  American  people  were  relieved  at  the  prospect  of  being 
able  to  scrap  the  war  organization  and  to  return  to  a  gen- 
erous degree  of  indi\adualism  in  their  business  pursuits.^ 
The  paramount  form  of  government  control  is  familiar 
under  the  name  of  government  regulation.  Regulation  has 
been  carried  furthest  in  thos*  branches  of  economic  activity 
which  are  in  the  nature  of  public  utilities.  During  the 
last  fifteen  to  twenty  years,  a  group  of  city,  state,  and 
federal  commissions  have  grown  up  to  regulate  rates  and 
services  for  public  utility  corporations.  Such  corporations 
include  the  telegraph,  the  telephone,  water,  light,  gas,  street 
railways,  and  steam  railroad  companies.  The  railroads 
have  been  subject  to  a  great  deal  of  scattered  regulation 
by  the  separate  states,  but  of  late  the  supremacy  of  the 
federal  commission   over  all  interstate  carriers  has  been 

1  W.  F.  Willoughby,  "Government  Organization  in  War  Time  and 
After." 


Public  Control  461 

definitely  established.  The  other  classes  of  public  utility- 
corporations  have  for  the  most  part  been  subjected  merely 
to  state  and  municipal  regulating  commissions.  These 
commissions  have  been  indispensable  in  order  to  protect  the 
public  from  unreasonable  or  unfair  rates,  and  from  inferior 
and  inadequate  service.  Commission  regulation  of  these 
corporations  has  come  to  be  accepted  as  a  necessary  public 
policy,  and  the  rulings  of  the  commissions  have  as  a  gen- 
eral rule  been  tempered  with  a  commendable  fairness  and 
reasonableness. 

The  principle  of  regulation  has  been  most  fully  devel- 
oped in  the  great  interstate  railroad  systems  of  the  country. 
Kailroad  transportation  is  the  largest  single  industry  in 
the  country  in  regard  to  capital  invested,  labor  employed, 
and  public  importance.  The  railroads  are  a  key  industry 
of  the  country,  and  transportation  is  an  indispensable  aid 
in  the  conduct  of  practically  every  important  business. 

The  railroads  early  developed  abuses  in  the  level  of  rates 
charged,  in  unfair  practices  such  as  rebates,  and  in  the 
quality  of  the  service  rendered,  and  in  1887  Congress 
created  the  Interstate  Commerce  Commission.  From  that 
year  until  the  present  time  the  Commission  has  functioned, 
and  its  powers  and  duties  have  been  defined,  enlarged  and 
strengthened  by  several  subsequent  acts  of  legislation. 
The  latest  law  of  fundamental  significance  in  railroad  regu- 
lation is  the  Esch-Cummins  railroad  law  passed  in  1920. 
This  act  terminated  the  period  of  government  operation 
which  had  been  entered  upon  in  1917  as  a  war  measure, 
and  marked  out  greater  powers  than  had  ever  before  been 
placed  in  the  hands  of  federal  regulating  bodies.  The  main 
features  of  the  regulatory  machinery  and  its  powers  and 
functions  may  be  given  in  very  brief  and  condensed  form 
as  follows:  Regulatory  power  is  vested  in  an  Interstate 
Commerce  Commission  of  eleven  members,  each  drawing 
an  annual  salary  of  $12,000,  appointment  being  made  by 
the  President  with  the  consent  of  the  Senate.  Terms  of 
office  are  seven  years.  The  Commission  is  directed  by  the 
Esch-Cummins  law  to  fix  railroad  rates  at  a  level  which 
will  make  possible  the  payment  of  five  and  one-half  per 


462  Public  Control 

cent,  dividends  on  the  aggregate  value  of  the  carriers' 
property  for  the  two  years  immediately  following  the  ter- 
mination of  war  control  on  March  1,  1920.  Roads  which 
earn  in  excess  of  six  per  cent,  are  required  to  divide  the 
excess  equally  with  the  Government.  This  provision  for 
division  of  the  excess  above  six  per  cent,  is  a  permanent 
provision,  and  is  not  limited  merely  to  the  two-year  period 
just  mentioned.  The  railroads'  share  of  the  excess  goes 
into  a  reserve  fund  of  the  railroad,  and  can  only  be  drawn 
upon  for  the  meeting  of  dividend,  rent  and  interest  charges, 
and  for  that  purpose  only  to  the  extent  of  meeting  charges 
up  to  six  per  cent,  of  the  value  of  the  railroad's  property. 
The  Government's  share  of  the  excess  above  six  per  cent, 
goes  to  a  contingent  fund,  to  be  drawn  upon  to  extend 
necessary  credits  to  railroad  companies  or  to  purchase 
equipment  to  be  leased  to  them.  The  Commission  is  di- 
rected by  the  law  to  follow  as  a  permanent  principle  in 
rate-fixing  the  obligation  to  "prescribe  just  and  reasonable 
rates,"  so  that  the  carriers  as  a  whole  will,  "under  honest, 
efficient  and  economical  management  and  reasonable  ex- 
penditures for  maintenance  of  way,  structures  and  equip- 
ment, earn  an  aggregate  annual  net  railway  operating 
income  equal,  as  nearly  as  may  be,  to  a  fair  return  upon 
the  aggregate  value  of  the  railway  property."  The  Com- 
mission is  to  publish  from  time  to  time  ' '  what  percentage  of 
such  aggregate  property  value  constitutes  a  fair  return 
thereon."  The  five  and  one-half  per  cent,  mentioned  above 
is  given  as  the  rate  of  fair  return  for  the  first  two  years 
following  the  abandonment  of  war  control  of  the  roads. 
Prior  to  the  Esch-Cummins  law  the  Commission  had  power 
to  fix  maximum  rates,  but  the  new  law  gave  it  power  also 
to  fix  minimum  rates.  This  provision  enables  the  Commis- 
sion to  prevent  the  stronger  roads  from  engaging  in  forms 
of  "rate-cutting"  which  amount  to  "cut-throat  competi- 
tion." These  rate-fixing  powers  are  equivalent  to  what 
would  be  price-fixing  powers  in  the  ordinary  line  of  in- 
dustry. 

The  Commission,  moreover,  has  supervision  over  the  is- 
suance of  stocks  and  bonds  by  railroads,  its  approval  being 


Public  Control  463 

necessary  before  new  issues  can  be  made.  The  guiding 
criterion  for  the  Commission  in  passing  upon  proposed 
security  issues  is  whether  the  new  securities  are  "reason- 
ably necessary  and  appropriate"  for  giving  proper  trans- 
portation service  to  the  public.  Another  provision  refers 
to  combinations  of  railroad  companies,  and  permits  com- 
binatioms  by  methods  constantly  subject  to  the  Commis- 
sion's approval,  provided  such  combinations  are  brought 
about  "under  a  lease  or  by  the  purchase  of  stock,  or  in 
any  other  manner  not  involving  the  consolidation  of  such 
carriers  into  a  single  system  for  ownership  and  operation." 
As  soon  as  practicable,  the  Commission  is  directed  to  pre- 
pare a  nationwide  plan  for  the  consolidation  "of  the  rail- 
way properties  of  the  United  States  into  a  limited  number 
of  systems,"  and  consolidations  of  railway  corporations  in 
ownership  and  operation  are  permitted  under  the  discre- 
tion of  the  Commission.  Such  railroad  combinations  and 
consolidations  are  specifically  exempted  from  all  previ- 
ously enacted  laws  for  the  regulation  and  control  of  trusts. 
This  general  provision  of  the  Act  looks  toward  a  unifica- 
tion and  co-ordination  of  the  railway  lines  of  the  country, 
and  is  an  outgrowth  of  the  lessons  learned  in  railway 
operation  during  the  war  period  when  unification  and  co- 
ordination of  the  lines  were  of  the  utmost  importance.  A 
further  set  of  provisions  empowers  the  Commission  to  re- 
quire of  the  carriers  during  normal  times  the  proper 
amount  and  quality  of  service  to  insure  that  the  transpor- 
tation needs  of  the  nation  are  reasonably  met,  and  during 
times  of  stress  or  emergency  to  redistribute  railroad  equip- 
ment and  service  in  any  way  necessary  to  meet  the  demands 
of  the  emergency  period.  Complete  control  of  all  railroad 
operations  would  fall  to  the  Commission  in  case  the  emer- 
gency were  war  or  the  imminent  threat  of  war.  A  branch 
of  this  general  class  of  provisions  empowers  the  Commis- 
sion to  require  the  joint  use  of  terminals  by  various  roads, 
and  to  apply  priorities  and  preferences  in  the  use  of  rail- 
road equipment  when  desirable.  Old  roads  cannot  be 
abandoned  nor  new  ones  constructed  without  the  approval 
of  the  Commission.     These  powers  constitute  in  their  en- 


464  Public  Control 

tirety  a  compreliensive  control  over  virtually  all  vital  parts 
of  the  railroad  business,  and  by  thus  regulating  rates,  ser- 
vice, finance,  construction,  competition,  consolidation  and 
dividends,  the  Interstate  Commerce  Commission  assumes  a 
position  of  the  greatest  importance  in  guaranteeing  that 
the  transportation  facilities  of  the  country  shall  render  the 
public  reasonable  service  under  reasonable  terms. 

One  group  of  provisions  in  the  Esch-Cummins  railroad 
bill  establishes  regulatory  machinery  for  the  adjustment  of 
disputes,  grievances  and  relations  between  the  railroad 
companies  and  their  employees.  The  railroads  and  la- 
borers may  by  mutual  agreement  set  up  Boards  of  Labor 
Adjustment  to  settle  all  disputes  regarding  "grievances, 
rules  or  working  conditions."  These  voluntary  Adjust- 
ment Boards  are  supplemented  by  a  Railroad  Labor  Board, 
composed  of  nine  members,  three  each  representing  em- 
ployers, employees  and  the  public.  The  powers  of  this 
national  board  authorize  it  to  proceed  to  investigate  any 
railroad  disputes  which  are  not  being  adequately  taken  care 
of  by  the  voluntarily  formed  Adjustment  Boards.  Beyond 
this,  the  Railroad  Labor  Board  has  exclusive  jurisdiction 
over  the  final  settlement  in  all  wage  disputes.  The  powers 
of  the  Railroad  Labor  Board  thus  comprehend  not  merely 
the  disputes  about  "grievances,  rules,  and  working  condi- 
tions," but  about  wages  as  well.  The  Board  has  power  to 
enter  upon  an  investigation  of  any  dispute  which  threatens 
to  interrupt  the  operation  of  the  roads,  and  to  make  an 
award  in  settlement  of  the  dispute.  The  Board  relies  upon 
publicity  and  public  opinion  for  the  enforcement  of  its 
decisions.  In  the  early  history  of  the  bill,  a  definite  anti- 
strike  clause  was  proposed,  enabling  the  Board  to  enforce 
all  of  its  decisions,  and  giving  it  power  to  impose  fine  or 
imprisonment  upon  employers  or  employees  who  might  fail 
to  obey  decisions.  This  proposed  clause  was  bitterly  fought 
by  labor  leaders,  and  by  some  public  authorities,  so  that  as 
finally  arranged  in  conference  the  law  excluded  the  anti- 
strike  clause  and  relied  upon  public  opinion  for  enforce- 
ment of  decisions.  Investigation  of  disputes  is  compulsory, 
and  regardless  of  whether  employees  or  employers  so  desire, 


Public  Control  465 

the  Board  is  under  obligation  to  make  an  award  and  give 
the  terms  of  the  award  wide  enough  publicity  to  create  an 
informed  public  opinion  on  the  case. 

The  Railroad  Labor  Board  and  the  Interstate  Commerce 
Commission  therefore  together  hold  firm  control  over  every 
important  phase  of  railroad  operation.  Through  these 
agencies  public  regulation  of  the  greatest  public  utility  of 
the  nation  is  made  thorough  and  far-reaching.  The  major 
owners  of  railroad  securities  and  the  executives  of  the  roads 
were  very  eager  to  recover  the  lines  from  the  hands  of  the 
government,  and  to  resume  private  operation.  Private 
operation  under  such  drastic  regulation  places  private 
initiative  and  competition  on  a  new  plane.  Competition  of 
service  is  much  talked  about,  and  competition  in  efficiency 
and  economy  is  approved  of.  But  even  these  forms  of  com- 
petition are  subject  to  intimate  regulation  on  the  part  of 
the  Commission.  The  condition  of  the  railroads  since  the 
enactment  of  the  Esch-Cummins  law  has  not  been  fully 
satisfactory,  and  weighty  difficulties  have  appeared  in 
securing  adequate  railroad  credits,  in  effecting  adequate 
economies  in  operation,  and  in  working  out  satisfactory 
adjustment  of  labor  relations.  Not  a  few  authorities  feel 
that  eventually  the  present  form  of  drastic  regulation  will 
lead  to  outright  government  ownership  and  operation. 
Perhaps  one  of  the  strongest  forces  tending  in  the  direc- 
tion of  government  operation  is  the  force  of  menacing  labor 
relations.  The  roads  and  their  employees  apparently  are 
unable  to  find  any  basis  of  common  understanding,  and  a 
state  of  distrust  and  suspicion  prevails  widely.  Rumors  of 
strikes  and  threats  of  strikes  are  constantly  being  heard, 
and  unless  the  roads  can  find  ways  of  adjustment  of  trou- 
bles with  labor  the  possibility  of  government  operation  is 
not  a  light  one. 

The  personnel  of  the  Interstate  Commerce  Commission 
and  of  the  Railroad  Labor  Board  and  Adjustment  Boards 
has  a  steady  influence  upon  the  .success  of  regulation.  For- 
tunately the  appointments  made  are  of  a  nature  to  com- 
mand a  reasonable  amount  of  public  confidence.  Probably 
a  weightier  factor  in  the  success  of  regulation  exists  in  the 


466  Public  Control 

motives  and  psychology  which  prevails  among  both  the  rail 
executives  and  the  rail  laborers.  Their  reactions  and  atti- 
tudes and  motives  determine  fundamentally  the  effect  of 
regulation  upon  railroad  service  to  the  public.  On  the 
labor  side,  it  should  be  observed  that  labor  union  leaders 
give  evidence  of  a  profounder  respect  for  the  vital  needs  of 
the  public  than  they  were  willing  to  during  the  days  of 
1916  when  the  persistent  threat  to  strike  led  to  the  Adam- 
son  Act  regulating  hours  of  labor.  The  laborers,  however, 
feel  a  continual  suspicion  of  the  owners  and  executives, 
believing  that  they  are  utterly  unwilling  to  grant  the  la- 
borers adequate  wages,  adequate  union  representation,  and 
adequate  working  conditions.  This  suspicion  prevents  a 
sound  morale  among  the  army  of  railroad  workers,  and  as 
long  as  it  persists  in  its  present  unhealthy  degree  the  trials 
of  those  who  are  responsible  for  regulation  will  be  heavy, 
and  the  service  of  transportation  will  be  below  its  possi- 
bilities. On  the  part  of  the  railroad  presidents  and  execu- 
tives, it  is  probably  accurate  to  state  that  the  sense  of 
public  responsibility  has  materially  increased  in  recent 
years.  For  the  most  part  they  admit  the  inevitability  and 
necessity  of  thorough  regulation,  and  are  disposed  as  a 
rule  to  give  reasonable  co-operation  to  the  regulators.  In 
this  respect,  the  "public  be  damned"  attitude  is  mainly  a 
thing  of  the  past,  and  a  "public  be  served  and  pleased" 
attitude  is  more  in  evidence.  The  low  salaries  paid  to  rail- 
road executives,  in  comparison  with  those  paid  to  the 
largest  industrial  executives,  has  led  as  responsible  a  rail- 
road official  as  Daniel  Willard  to  remind  the  country  that 
under  such  salary  scales  the  best  executive  ability  will  not 
in  future  years  be  attracted  to  railroad  positions.  Such  a 
drift  of  the  best  executive  ability  of  the  country  toward 
the  higher  paid  industrial  positions  would  leave  the  man- 
agement of  the  railroads  to  second-rate  ability.  In  the 
course  of  time,  such  a  tendency  would  severely  handicap 
the  transportation  service  of  the  country. 

The  development  of  motives  among  great  railroad  execu- 
tives is  splendidly  suggested  by  a  remark  by  Otto  H.  Kahn 
on  the  railroad  career  of  one  of  the  greatest  figures  in 


Public  Control  467 

American  railroad  history,  Edward  H.  Harriman:  "His 
career  was  the  embodiment  of  unfettered  individualism. 
For  better  or  for  worse — personally  I  believe  for  better 
unless  we  go  too  far  and  too  fast — the  people  appear  deter- 
mined to  put  limitations  and  restraints  upon  the  exercise 
of  economic  power,  just  as  in  former  days  they  put  limits 
and  restraints  upon  the  absolutism  of  rulers.  Therefore,  I 
believe  there  will  be  no  successor  to  Mr.  Harriman;  there 
will  be  no  other  career  like  his. ' '  The  ability  of  great  men 
to  harness  their  capacities  in  a  co-operative  enterprise  as 
enthusiastically  and  energetically  as  they  formerly  did  in 
individualistic  effort  lies  at  the  base  of  all  questions  of 
success  in  the  new  era  of  complete  regulation  of  railway 
enterprise. 

Regulation  of  banking  has  been  described  in  detail  under 
the  chapter  having  to  do  with  MONEY  AND  CREDIT. 
At  this  stage  it  is  enough  to  point  out  that  the  Federal  Re- 
serve System  establishes  a  machinery  for  the  regulation  of 
banking  practice,  but  that  this  regulation  goes  to  no  such 
extreme  as  does  the  regulation  of  the  railroads.  The  man- 
ner of  selection  of  the  directors  of  the  Federal  Reserve 
Banks  gives  to  the  bankers  themselves  the  real  power  in 
selecting  the  dominant  portion  of  the  boards  of  directors. 
Banking  regulation  does  not  come  merely  from  the  top 
down,  but  fundamentally  organizes  the  bankers  themselves 
in  a  co-operative  treatment  of  banking  problems.  There  is 
less  government  dictation  and  more  self-discipline  in  the 
Federal  Reserve  Board.  A  question  which  promises  to 
become  of  increasing  public  interest  relates  to  the  powers 
of  the  Federal  Reserve  System  in  stabilizing  business  con- 
ditions and  averting  the  extremes  of  business  cycles. 
Many  students  believe  that  a  proper  regulation  of  discount 
and  interest  rates  would  restrain  business  from  excessive 
expansion  in  times  of  prosperity,  thereby  avoiding  ex- 
tremes of  depression,  and  would  encourage  recovery  by 
offerings  of  credit  at  low  rates  during  dull  business  periods. 
This  issue  is  the  center  of  much  thought  and  discussion, 
and  a  decision  in  favor  of  strong  powers  of  this  sort  in  the 
hands  of  the  Federal  Board  would  have  deep  consequences 


468  Public  Control 

for  the  business  community.  The  traditions  of  individual- 
ism in  banking  are  against  the  move,  whereas  those  who  are 
not  afraid  that  co-operation  and  control  in  this  way  would 
be  paternalistic  are  more  inclined  to  be  favorable. 

General  Regulation  of  Business 

The  general  regulatory  machinery  for  ordinary  business 
activity  exists  mainly  in  the  Federal  Trade  Commission 
and  in  the  judiciary.  The  basic  laws  establishing  definite 
control  are  the  Sherman  Anti-trust  Law  of  1890  and  the 
Federal  Trade  Commission  and  Clayton  Acts  of  1914. 
Outside  of  these  statutory  laws,  the  courts  have  dealt  with 
business  practices  to  a  considerable  extent  under  the  prin- 
ciples of  the  common  law. 

The  Sherman  Act  of  1890  decreed  that  ' '  Every  contract, 
combination  in  the  form  of  trust  or  otherwise,  or  con- 
spiracy, in  restraint  of  trade  or  commerce  among  the  several 
States,  or  with  foreign  nations,  is  hereby  declared  to  be 
illegal"  and  that  "Every  person  who  shall  monopolize,  or 
attempt  to  monopolize,  or  combine  or  conspire  with  any 
other  person  or  persons,  to  monopolize  any  part  of 
the  trade  or  commerce  among  the  several  States,  or  with 
foreign  nations,  shall  be  deemed  guilty  of  a  misdemeanor. ' ' 
The  gist  of  the  act  concerned  itself  with  combination  to 
restrain  trade  or  to  form  monopoly.  For  more  than  a 
decade  following  the  enactment  of  the  law,  the  interpreta- 
tions placed  upon  it  by  the  courts  made  it  of  slight  effect 
upon  business  combinations,  and  few  cases  were  brought  to 
trial.  In  1904  and  1905,  the  court  made  a  severe  applica- 
tion of  the  law  in  cases  involving  the  Addyston  Pipe  Com- 
pany and  the  Northern  Securities  Company,  the  court 
holding  that  these  companies  had  the  effect  of  a  restraint 
upon  competition  and  trade  between  the  States.  In  1911, 
the  court  ordered  the  dissolution  of  two  of  the  most  power- 
ful trusts  ever  formed,  the  Standard  Oil  Company  and  the 
American  Tobacco  Company,  on  the  ground  that  these  com- 
binations caused  undue  and  unreasonable  restraint  of 
trade.  These  decisions  constituted  epoch-marking  interpre- 
tations of  the  Sherman  Act  by  drawing  a  line  of  difference 


Public  Control  469 

between  reasonable  and  unreasonable,  or  due  and  undue 
restraint  of  trade.  Previously  it  had  been  assumed  that 
all  restraint  of  trade  was  illegal,  but  these  decisions  pointed 
out  that  a  standard  of  reason  must  be  applied  in  each  sepa- 
rate case  to  the  acts  of  a  business  combination.  In  any- 
new  case  presented  to  the  court,  it  became  therefore  neces- 
sary for  the  court  to  determine  as  a  matter  of  commercial 
fact  whether  the  acts  of  the  business  combination  under 
question  were  reasonable  or  unreasonable  restraint  of  trade. 
The  looseness  of  this  "rule  of  reason"  left  business  men 
with  the  feeling  that  they  were  conducting  their  business 
under  a  regime  of  great  uncertainty.  Business  men  could 
not  make  intelligent  guesses  as  to  what  the  court's  notion 
of  reasonable  restraint  might  be. 

One  very  important  question  had  to  do  with  the  issue  of 
whether  mere  size  itself,  if  great  enough,  might  be  declared 
monopolistic  and  unreasonable  restraint  of  trade.  The 
Supreme  Court  gave  its  opinion  on  that  issue  in  1915  in  a 
decision  favorable  to  the  United  States  Steel  Corporation, 
where  it  was  declared :  ' '  We  dismiss  once  and  for  all  the 
question  of  the  mere  volume  or  bigness  of  business.  The 
question  before  us  is  not  how  much  business  was  done,  or 
how  large  the  company  that  did  it.  The  vital  question  is : 
'How  was  the  business,  whether  big  or  little,  done  ?  Was 
it,  in  the  test  of  the  Supreme  Court,  done  without  prejudic- 
ing the  public  interests  by  unduly  restricting  or  unduly 
obstructing  trade?  The  question  is  one  of  undue  restric- 
tion or  obstruction,  and  not  one  of  volume  of  trade."  In  a 
subsequent  decision  on  the  same  corporation,  rendered 
March  1,  1920,  the  Supreme  Court  found  the  steel  cor- 
poration not  guilty  of  unreasonable  restraint  of  competi- 
tion and  trade.  The  government  attorneys  who  were 
prosecuting  the  corporation  were  unable  to  find  any  inde- 
pendent steel  companies  who  were  of  the  opinion  that  the 
trade  practices  or  price  policies  of  the  company  were 
unfair,  and  not  a  single  independent  company  wanted  to 
testify  against  the  United  States  Steel  Corporation.  The 
Court  re-emphasized:  "The  law  does  not  make  mere  size 
an  offense,  or  the  existence  of  unexerted  power  an  offense." 


470  Public  Control 

The  emphatic  ring  of  these  court  opinions  is  somewhat 
weakened,  and  a  measure  of  doubt  raised,  by  a  decision  in 
1920  dissolving  a  holding  company  known  as  the  Reading 
Company.  The  court  based  its  opinion  upon  the  charge 
that  the  company  had  secured  "dominating  control"  of 
certain  railroad  and  coal  properties  not  by  "superior  and 
enterprising  management,"  but  by  "deliberate  calculated 
purchase  for  control,"  and  held  "that  such  power,  so  ob- 
tained, regardless  of  the  use  made  of  it,  constitutes  a 
menace  to  and  an  undue  restraint  upon  interstate  com- 
merce within  the  meaning  of  the  anti-trust  act,  has  been 
frequently  held  by  this  court." 

The  laws  of  1914  were  the  Federal  Trade  Commission 
Act  and  the  Clayton  Act.  The  most  significant  feature  of 
these  enactments  is  the  creation  of  a  commission  to  investi- 
gate trade  practices  and  competition  policies  and  to  apply 
the  principles  of  government  control  of  business  in  a  flex- 
ible and  constructive  manner.  The  Commission  is  em- 
powered to  prevent  unfair  competition  among  business 
concerns,  and  in  case  the  corporation  fails  to  obey  the  Com- 
mission's  order,  it  may  appeal  to  a  Federal  circuit  court 
of  appeals  for  an  enforcing  order.  It  may  conduct  investi- 
gations from  time  to  time  into  the  "organization,  business 
conduct,  practices  and  management"  of  corporations,  and 
may  require  corporations  to  submit  reports  covering  infor- 
mation about  their  business,  and  to  maintain  uniform  cost 
accounting  systems,  open  to  the  scrutiny  of  the  Commis- 
sion. The  Commission,  moreover,  is  authorized  to  inform 
itself  as  to  whether  corporations  obey  the  decrees  of  the 
court  under  the  anti-trust  acts,  and  to  report  the  facts  to 
the  Attorney-General.  It  shall  also  make  investigations  to 
discover  violations  of  the  anti-trust  acts,  and  shall  make 
recommendations  for  the  reform  of  any  corporations  found 
to  be  violating  the  law,  * '  in  order  that  the  corporation  may 
thereafter  maintain  its  organization,  management,  and 
conduct  of  business  in  accordance  with  law."  The  Com- 
mission may  utilize  the  power  of  publicity  as  a  means  of 
controlling  the  policies  of  corporations.  It  may  make  in- 
vestigations of  foreign  trade,  and  may  seek  out  information 


Public  Control  471 

in  foreign  countries  bearing  upon  trade  combinations  of 
the  United  States.  It  is  an  administrative  body  for  tlie 
application  of  the  provisions  contained  in  the  Clayton  Act. 
The  Commission  has  cleared  the  air  for  business  men  a 
great  deal  by  drawing  up  and  publishing  lists  of  fair  and 
unfair  practices  of  competition,  so  that  business  men  may 
know  with  some  definiteness  what  they  will,  and  what  they 
will  not,  be  prosecuted  for. 

The  Clayton  Act  proceeds  to  define  two  of  the  most  ob- 
jectionable forms  of  unfair  competition,  namely,  price  dis- 
criminations and  "tying  arrangements,"  i.e.,  such  arrange- 
ments as  requiring  merchants  to  bind  themselves  to  sell 
at  certain  prices  or  to  buy  exclusively  from  certain  deal- 
ers. These  types  of  competition  are  specifically  branded 
as  unfair  and  illegal,  and  it  is  the  duty  of  the  Federal 
Trade  Commission  to  prevent  business  concerns  from  in- 
dulging in  them.  In  addition,  the  Commission  is  given  a 
blanket  authority  to  prevent  any  and  all  forms  of  unfair 
competition.  Also,  the  act  forbids  the  formation  of  holding 
companies  or  of  interlocking  directorates  where  the  result 
may  be  to  substantially  lessen  competition  or  to  restrain 
trade  or  to  tend  to  create  a  monopoly,  and  it  is  the  duty  of 
the  Federal  Trade  Commission  to  see  that  these  provisions 
are  enforced.  The  acts  of  1914  are  a  broad  constructive 
move  in  the  direction  of  guiding  business  instead  of  merely 
punishing  it;  of  making  clear  what  is  legal  and  what  is 
not;  and  of  co-operating  with  business  tOAvard  the  end  of 
securing  business  methods  which  are  sound  public  policy 
and  in  accord  with  the  law. 

The  fundamental  purposes  in  the  government  attitude 
toward  business  combination  and  business  methods  have 
not  always  been  clear  and  definite.  One  general  purpose 
has  been  to  maintain  and  safeguard  competitive  methods 
in  business.  The  decrees  of  the  courts  have  often  defined 
their  purpose  as  being  to  "restore  competitive  conditions," 
and  the  laws  that  have  been  passed  have  announced  their 
objective  as  the  prevention  of  restraints  upon  competition. 
But  the  competition  which  is  to  be  preserved  is  not  a  com- 
pletely independent  and  unguided  competition;  rather,  it 


472  Public  Control 

is  a  competition  which  is  required  to  keep  within  certain 
bounds  of  "fairness."  It  is  a  competition,  moreover, 
which  may  be  subject  to  some  restraint  and  suppression  by 
business  combinations,  provided  only  that  such  restraint  is 
not,  in  the  view  of  the  court,  "unreasonable."  And  the 
new  competition  allows  for  a  substantial  measure  of  co- 
operation between  competing  business  units.  The  vast 
extension  of  organizations  such  as  trade  associations  is  a 
move  in  the  nature  of  co-operation  between  the  several 
business  units  in  the  various  lines  of  trade.  Co-operation 
is  the  life  of  trade.  "Only  by  co-operation  can  the  enor- 
mous wastes  of  competition  be  avoided."  Co-operation  is 
not  the  antithesis  of  competition,  but  the  supplement,  and 
an  invaluable  supplement,  in  the  successful  organization  of 
modern  industry  and  trade.  The  element  of  co-operation 
is  encouraged  by  the  government  in  the  railroads  of  the 
country,  under  the  supervision  of  the  Interstate  Commerce 
Commission.  It  needs  to  be  more  definitely  approved  for 
industry  and  trade  in  general;  and  clear  definitions  are  in 
need  of  formulation,  of  fair  and  unfair,  reasonable  and 
unreasonable  co-operation.  Co-operation  has  been  estab- 
lished by  the  terms  of  the  Webb  Act  for  corporations 
entering  into  foreign  trade,  and  under  the  terms  of  the 
Edge  Act  for  banking  companies  engaged  in  the  handling 
of  investments  and  credits  for  the  financing  of  foreign 
trade.  Misguided  co-operation  would  of  course  lead  to 
forms  of  monopoly  which  would  be  undesirable.  In  both 
the  coal  industry  and  the  meat  packing  industry  it  has  of 
late  been  seriously  proposed  to  add  to  existing  provisions 
for  government  regulation  to  the  end  that  competition  and 
co-operation  in  those  industries  may  be  properly  balanced. 
The  purpose  of  government  control  as  at  present  applied 
deserves  to  recognize  the  importance  of  properly  blending 
the  principles  of  competition  and  co-operation  in  economic 
organization. 

In  the  past,  a  primary  purpose  of  anti-trust  legislation 
and  administration  frequently  has  been  the  prevention  of 
business  from  growing  too  large.  The  popular  philosophy 
of  business  at  the  time  of  the  enactment  of  the  Sherman 


Public  Control  473 

Act  in  1890  found  big  business  dangerous  and  menacing 
because  of  its  very  bigness.  The  provisions  of  the  Clayton 
Act  against  holding  companies  and  interlocking  direc- 
torates are  a  tribute  to  the  same  fear  of  large  industrial 
and  commercial  power.  The  Supreme  Court  has  in  some 
recent  decisions  declared  that  mere  size  is  not  in  itself  ille- 
gal, but  doubt  as  to  what  is  definitely  meant  by  such  a 
declaration  is  raised  by  such  a  judicial  attitude  as  was  taken 
in  1914  by  a  Federal  district  court  in  decreeing  the  disso- 
lution of  the  International  Harvester  Company.  In  part, 
that  decision  stated,  ' '  There  is  no  limit  under  the  American 
law  to  which  a  business  may  not  independently  grow,  and 
even  a  combination  of  two  or  more  businesses,  if  it  does  not 
unreasonably  restrain  trade,  is  not  illegal;  but  it  is  the 
combination  which  unreasonably  restrains  trade  that  is 
illegal,  and  if  the  parties  in  controversy  have  80  or  85  per 
cent,  of  the  American  business,  and  by  the  combination  of 
the  companies  all  competition  is  eliminated  between  the 
constituent  parts  of  the  combination,  then  it  is  in  restraint 
of  trade  within  the  meaning  of  the  statute,  under  all  of 
the  decisions,"  This  comes  close  to  declaring  that  the  com- 
pany unreasonably  restrains  trade  because  of  its  very  big- 
ness, in  that  it  controls  over  80  per  cent,  of  the  business. 
Does  size  itself  constitute  unreasonable  restraint  ?  In  the 
decision  of  the  Supreme  Court  in  1920  dissolving  the  Read- 
ing Company,  it  was  the  "dominating  control"  of  the 
company,  even  though  it  were  in  the  form  of  "unexerted 
power"  which  figured  largely  in  the  logic  of  the  decision. 
The  doubtful  attitude  toward  bigness  is  further  revealed 
in  a  statement  by  the  chairman  of  the  Federal  Trade  Com- 
mission made  in  1918  as  follows,  "The  principal  unsettled 
question  remaining  appears  to  be  whether  a  monopolistic 
combination  with  the  power  to  crush  its  competitors  is  not 
against  public  policy  and  contrary  to  the  law,  even  though 
it  were  not  shown  to  have  exerted  that  power."  And  the 
chairman  explains  his  personal  conviction  that  "In  ordi- 
nary industry  and  trade,  however,  the  maximum  social  ad- 
vantage is  not  in  concentration  and  unitary  organization, 
but  rather  in  the  competition  of  numerous  efficient  private 


474  Public  Control 

enterprises."^  It  at  least  seems  certain  that  in  any  cases 
where  combination  is  allowed  to  attain  so  great  a  size  as  to 
amount  to  private  monopoly,  rigid  government  control 
similar  to  that  provided  by  the  Interstate  Commerce  Com- 
mission will  be  applied. 

The  history  of  efforts  at  business  control  for  more  than 
thirty  years  teaches  emphatically  that  large  business  estab- 
lishments are  inevitable  in  the  present  economic  period. 
Business  units  of  sufficient  size  to  realize  the  economies  of 
large  scale  operation  are  a  natural  outcome  of  the  economic 
system  based  upon  modern  mechanics,  science,  and  tech- 
nology. Economic  evolution  and  social  progress  alike  ac- 
knowledge a  place  for  the  large-scale  business  establish- 
ment. Decrees  of  dissolution  made  by  the  courts  have 
proved  in  large  measure  futile.  Communities  of  interest, 
holdings  of  stock  in  various  corporations  by  friendly  par- 
ties, secret  understandings  and  concert  of  policy  spring  up 
in  one  way  and  another.  It  often  has  been  doubted  whether 
"the  mere  dissolution  of  industrial  combinations  accom- 
plishes anything."^  The  words  of  VanHise  seem  thor- 
oughly justified,  "Concentration  and  co-operation  in  indus- 
try in  order  to  secure  efficiency  are  a  world-wide  movement. 
The  United  States  cannot  resist  it."  As  fast  as  one  form 
of  combination  has  been  attacked  by  the  courts,  another 
form  has  been  invented.  The  pool  gave  way  to  the  trust, 
the  trust  to  the  holding  company,  and  the  holding  company 
often  to  the  amalgamation,  the  merger  or  the  community  of 
interest.  Control  of  business  methods,  of  forms  of  co- 
operation and  competition,  and  condemnation  of  evil  busi- 
ness practices  have  met  with  a  reasonable  measure  of 
success;  but  when  the  attack  has  been  upon  mere  size  be- 
cause of  the  dangers  of  size,  it  has  happened  that  "Not- 
withstanding all  the  law  against  agreements  in  restraint  of 
trade,  the  present  generation  has  seen  the  greatest  move- 
ment toward  consolidation  which  is  recorded  in  economic 

1 W.  B.  Colver,  "American  Problems  of  Reconstruction,"  edited 
by  E.  M.  Friedman,  Chapter  X. 

2  See  A.  A.  Young,  Journal  of  Political  Economy,  pp.  204-219, 
430-431. 


Public  Control  475 

history."^  It  is  of  significance  that  Great  Britain  has 
during  and  since  the  war  given  direct  governmental  en- 
couragement to  the  organization  of  business  on  a  compre- 
hensive and  adequate  scale.  The  trouble  with  the  attitude 
of  the  past  has  been  fundamentally  that  people  were  unable 
to  discern  the  psychological  forces  which  were  working  in 
the  direction  of  large  business  organizations.  The  develop- 
ment of  the  resources  of  the  American  continent,  the  possi- 
bilities in  the  utilization  of  modern  inventions  and  scientific 
discoveries,  the  economies  and  advantages  to  be  realized  by 
big  undertakings,  the  seats  of  economic  power  that  could 
be  occupied  by  those  who  succeeded  in  large  business  or- 
ganization, the  achievements  which  would  be  a  tribute  to 
mammoth  creative  ability, — all  these  were  considerations 
which  fired  the  imaginations  of  men  of  genius.  The  last 
generation  has  been  endowed  with  not  a  few  men  of  rare 
and  extraordinary  capacities,  and  the  opportunities  in  the 
economic  world  which  stretched  out  before  them  set  loose 
their  unparalleled  energies.  Men  in  whom  the  master  in- 
stincts of  domination,  constructiveness,  possession,  fame, 
power,  and  thought  were  of  extreme  force  were  stimulated 
to  their  highest  endeavors  by  the  challenge  of  economic 
circumstances.  People  and  governments  made  the  mistake 
of  supposing  that  this  titanic  psychological  energy  could 
be  suppressed  or  abolished  by  the  enactment  of  a  law  or  a 
paper  dissolution  by  the  courts.  Great  human  energies 
were  operating  in  full  force,  and  when  they  were  balked  at 
one  point,  they  found  an  outlet  at  other  points.  The  human 
energies  of  men  could  not  be  suppressed ;  they  could,  how- 
ever, be  disciplined.  They  could  be  guided,  directed,  and 
brought  into  the  service  of  the  economic  needs  of  the  com- 
munity. And,  of  late,  the  effort  of  business  control  along 
these  lines  is  a  truer  recognition  of  the  psychology  of  busi- 
ness combination,  and  for  that  reason  has  a  sounder  promise 
of  success. 

The  possibility  of  making  over  the  forms  of  expression 
which  will  give  satisfaction  to  the  instincts  of  great  cap- 

1  Bruce  Wyman,  "Control  of  tlie  Market,"  p.   142. 


476  Public  Control 

tains  of  industry  is  difficult  to  measure.  New  standards  of 
business  honor,  new  standards  of  business  ethics,  new 
standards  of  business  success  gradually  turn  the  emphasis 
away  from  mere  mouey-getting  or  individualistic  attain- 
ment toward  economic  statesmanship  and  constructive 
public  achievement.  There  is  much  reason  for  believing 
that  the  following  statement  of  the  late  George  W.  Perkins 
is  a  fair  description  of  the  movement  of  the  times :  * '  The 
individualistic  period  in  which  we  have  been  living  .  .  . 
quickly  brought  great  fortunes  to  individuals.  Money- 
making  has  been  the  one  all-absorbing  occupation  in  this 
country  for  the  last  forty  years.  ...  On  the  whole,  the 
individualistic  age  has  not  been  a  success,  either  for  the 
individual,  for  the  community  in  which  he  has  lived,  or  for 
the  nation.  This  period  is  passing  away.  ...  To  my  mind 
there  is  nothing  in  the  signs  of  the  times  so  certain  as  this. 
I  believe  the  sooner  the  man  of  the  future  understands  this, 
accepts  it,  and  prepares  to  shape  his  own  course  accord- 
ingly, the  more  successful  his  career  will  be,  the  better  off 
his  country  will  be,  and  the  happier  he  and  every  one  else 
will  be.  .  .  .  Our  only  decoration — the  almighty  dollar — 
is  not  as  highly  prized  as  it  used  to  be.  The  man  of  excep- 
tional ability,  of  more  than  ordinary  talent,  will  hereafter 
look  for  his  rewards,  for  his  honors,  not  in  one  direction 
but  in  two — first  and  foremost  in  some  public  work  accom- 
plished, and  second  in  wealth  acquired.  ...  In  my  judg- 
ment the  fashion  of  acquiring  wealth  simply  for  the  sake 
of  possessing  it  has  about  reached  its  greatest  height,  and 
the  fashion  of  performing  public  service  for  the  sake  of  its 
performance  is  coming  into  vogue.  "^  To  the  degree  that 
this  revaluation  and  rediscipline  of  motives  takes  place,  the 
economic  organization  of  the  country  will  increase  the 
measure  of  human  well-being  which  prevails,  and  private 
initiative  in  public  achievement  will  characterize  American 
business  life. 

1 E.   M.   Friedman,  "American  Problems  of  Reconstruction,"  pp. 
50-51. 


Public  Control  477 

Governmental  Control  of  Labor 

Labor  is  so  vital  a  part  of  productive  organization  that 
the  influence  of  government  control  over  it  becomes  of 
importance.  Government  control  of  the  laborers  of  the 
railroads  has  already  been  described  in  some  of  its  phases. 
Compulsory  investigation  of  disputes,  trusting  to  public 
opinion  for  enforcements  of  decisions  is  the  established 
mode  of  procedure  in  the  railroads.  The  State  of  Kansas 
has  attracted  much  attention  by  the  formation  of  a  State 
Court  of  Industrial  Relations,  to  settle  labor  disputes  in 
all  industries  of  vital  public  concern,  with  powers  not 
merely  of  compulsory  investigation,  but  also  of  compulsory 
acceptance  of  the  decision.  Both  the  railroad  method  and 
the  Kansas  method  arouse  the  bitter  antagonism  of  organ- 
ized labor,  because  it  is  felt  that  the  element  of  compulsion 
will  prove  to  be  an  entering  wedge  for  forcing  men  to  work 
against  their  will  and  for  involuntary  servitude.  The 
fundamental  principle  in  both  cases  is  the  uninterrupted 
operation  of  businesses  which  are  of  indispensable  and  vital 
public  service.  The  psychology  of  labor  caused  Congress 
to  eliminate  a  specific  anti-strike  clause  from  the  Esch- 
Cummins  railroad  bill,  and  has  deterred  other  states  from 
following  widely  the  precedent  of  compulsion  set  by  the 
Kansas  law.  The  psychology  of  labor  also  underlay  a  re- 
port made  by  a  special  industrial  commission  appointed  by 
President  "Wilson  in  1919  for  the  purpose  of  working  out 
an  industrial  reconstruction  program.  The  commission 
contained  seventeen  members,  persons  of  experience  and 
eminence  in  the  country;  and  great  importance  attaches  to 
their  belief  that  the  wide  application  of  compulsion  in  the 
settlement  of  industrial  disputes  is  inexpedient  and  unwise, 
with  the  parties  to  industry  in  their  present  mood;  and 
that  the  best  mode  of  maintaining  industrial  peace  and 
co-operation  lies  in  the  direction  of  a  nationwide  organiza- 
tion of  arbitration  and  mediation  machinery,  with  regional 
divisions,  exercising  the  right  of  investigation  and  publicity 
in  industrial  disputes,  but  not  clothed  with  compulsory 
powers  to  forbid  strikes.    In  the  big  meat  packing  Indus- 


478  Public  Control 

tries,  the  government  established  during  the  war  a  method 
of  federal  control  of  labor  relations  under  the  direction  of 
a  federal  judge,  Judge  Alschuler.  The  powers  of  the  fed- 
eral judge  were  extended  following  the  war  until  the  au- 
tumn of  1921,  and  the  Secretaries  of  Commerce,  of  Labor, 
and  of  Agriculture,  then  approved  the  termination  of  this 
federal  control  upon  the  understanding  that  the  meat 
packers  would  establish  forms  of  employee  represen- 
tation and  joint  conference  between  employers  and  em- 
ployees for  the  adjustment  of  industrial  relations.  Govern- 
ment control,  moreover,  has  frequently  taken  the  form  of 
injunctions,  in  such  forms  as  court  orders  forbidding  la- 
borers to  strike,  or  to  picket,  or  to  boycott,  or  to  engage  in 
some  other  practice  held  to  be  objectionable.  The  element 
of  compulsion  in  the  injunction  serves  to  stimulate  extreme 
bitterness  on  the  part  of  laborers,  and  they  feel  almost 
universally  that  the  injunction  deprives  them  of  their  free- 
dom and  rights  as  American  citizens  and  workingmen. 
The  injunction  is  a  measure  which  ought  to  be  used  only  in 
the  last  resort,  as  a  means  of  providing  indispensable  busi- 
ness service  to  the  public  or  of  protecting  just  rights  of 
employers.  Organized  labor  secured,  as  a  means  of  pro- 
tecting itself  from  court  restrictions,  the  insertion  in  the 
Clayton  Act  of  a  clause  which  stated  that  ''the  labor  of  a 
human  being  is  not  a  commodity  or  article  of  commerce," 
and  that  labor  organizations  are  lawful  under  the  anti- 
trust acts,  and  may  not  be  restrained  from  **  lawfully 
carrying  out  the  legitimate  objects  thereof."  Labor 
unions  entertained  the  hope  that  this  section  of  the  Clayton 
Act  would  give  them  a  new  status  of  immunity  from  inter- 
ference by  the  courts,  but  subsequent  judicial  decisions 
indicate  that  the  Clayton  Act  did  not  materially  alter  or 
improve  the  status  of  labor  organizations.  The  act  em- 
powers them  merely  to  lawfully  carry  out  legitimate 
objects,  and  it  remains  for  the  courts  to  give  their  own 
interpretation  to  the  words  lawful  and  legitimate.  The 
act  seems  in  no  substantial  degree  to  have  mitigated  the 
power  of  the  courts,  through  injunctions  or  decisions,  to 
control  the  practices  of  labor  organizations. 


Public  Control  479 

Experience  therefore  indicates  that  tlie  situation  of  the 
present  day  calls  for  the  minimum  of  government  compul- 
sion which  is  necessary  to  protect  vital  interests  of  the 
public,  and  for  the  creation  under  government  auspices  of 
machinery  for  nationwide  voluntary  arbitration  and  con- 
ciliation. The  arbitrary  suppression  of  the  mass  aspira- 
tions of  laborers  by  undue  government  control  would  be 
fraught  with  dangerous  psychological  results.  Where  labor 
unrest  reflects  grievances,  and  where  the  instincts  of 
groups  of  workers  are  aroused,  a  policy  of  suppression  can 
have  no  other  effect  than  to  stimulate  unnecessary  radi- 
calism, to  bring  about  a  balked  industrial  morale,  to  stimu- 
late sulkiness,  sabotage,  and  restriction  of  production,  to 
weaken  the  ties  of  Americanism  and  to  make  easy  the  work 
of  agitators.  The  psychology  of  the  mass  of  workers  re- 
quires not  merely  a  closing  of  certain  channels  of  human 
expression  which  society  deems  dangerous,  but  also  the 
opening  of  other  channels  for  the  satisfactory  expression 
of  the  powerful  human  impulses  of  labor.  When  bad  ex- 
pressions of  basic  labor  instincts  have  to  be  stifled,  good 
expressions  for  the  same  instinctive  energies  need  to  be 
created. 

Reform 

In  a  general  way,  reform  refers  to  those  efforts  to  im- 
prove human  affairs  which  take  their  initiative  from  leaders 
and  authorities  who  are  desirous  of  helping  the  mass  of 
their  fellowmen.  Reform  is  not  primarily  a  democratic 
method  because  it  does  not  exact  responsible  effort  and 
alert  self-expression  from  the  people  who  are  to  benefit 
most  by  it.  Reform  extends  a  helping  hand  from  the  top 
down  more  than  it  builds  a  self-earned  and  self-created 
improvement  through  the  democratic  organization  of  people 
from  the  bottom  up.  Society  abounds  with  social  students, 
public-spirited  citizens,  altruistic  business  men,  or  political 
leaders  anxious  to  serve  their  fellowmen,  who  are  con- 
tinually busy  effecting  reforms  for  the  good  of  society. 

Most  reform  efforts  of  the  present  day  are  directed 
toward  economic   conditions,   and   a  great   proportion   of 


480  Public  Control 

them  seek  their  ends  by  the  medium  of  political  legislation. 
Labor  legislation  is  a  leading  type  of  reform,  and  numerous 
organizations  exist  for  the  furtherance  of  such  legislation, 
conspicuous  among  Avhich  is  the  American  Association  for 
Labor  Legislation.  Labor  reforms  include  laws  establish- 
ing minimum  wages;  prohibiting  child  labor;  protecting 
women  in  industry;  assuring  workmen's  compensation  and 
insurance,  accident  prevention ;  fire  protection  and  sanitary 
working  conditions;  regulating  hours  of  labor  and  night 
w^ork;  maintaining  factory  inspection;  requiring  proper 
working  conditions;  supplying  adequate  housing;  restrict- 
ing the  immigration  of  alien  labor;  organizing  Americani- 
zation ;  creating  industrial  commissions ;  providing  employ- 
ment agencies;  and  endeavoring  to  help  the  worker  by 
every  device  conceivable  to  the  mind  of  a  reformer. 

There  are  numerous  societies  and  associations  whose 
function  is  to  spread  publicity  in  favor  of  some  reform,  or 
to  bring  pressure  to  bear  on  legislators,  or  to  bring  direct 
help  to  people  in  trouble.  These  societies  include  such 
different  agencies  as  the  Consumers'  League,  the  Federal 
Council  of  the  Churches  of  Christ  in  America,  the  Ameri- 
can Child  Hygiene  Association,  the  American  Home  Eco- 
nomics Association,  the  Child  Welfare  League  of  America, 
the  League  for  Industrial  Democracy,  the  Industrial  Y.  M. 
C.  A.,  the  National  Conference  of  Social  Work,  the  Na- 
tional Women's  Trade  Union  League,  the  Russell  Sage 
Foundation  and  other  foundations,  or  bureaus  of  indus- 
trial, social  and  economic  research.  Almost  every  field  of 
economics  has  its  set  of  leagues  and  societies  devoted  to 
reform. 

The  work  of  reformers  is  of  genuine  service,  for  it  pre- 
vents in  large  measure  low  standards  of  human  treatment 
in  the  economic  world,  it  alleviates  suffering,  and  it  arouses 
a  dormant  public  to  face  industrial  wrongs  and  provide 
remedies.  The  body  of  welfare  legislation,  of  uplift  work, 
and  of  reform  organization  has  raised  the  level  of  comfort 
and  happiness  in  the  nation  and  deserves  high  recognition. 
It  is  important,  however,  to  note  the  limits  within  which 
most  reforms  take  effect.    Reform  is  not  a  unified  compre- 


Public  Control  481 

hensive  program,  but  is  a  bundle  of  particularistic  pro- 
grams, each  sponsored  by  certain  groups  of  individuals 
who  devote  their  energies  to  the  accomplishment  of  mis- 
cellaneous or  single  reform  acts.  In  the  meantime,  the 
economic  institutions  remain  fundamentally  unchanged, 
and  in  their  normal  functioning  result  in  a  fairly  steady 
output  of  the  troubles,  distresses,  injuries  and  v^^rongs 
v^'hich  reformers  can  only  lighten  or  alleviate.  A  great  deal 
of  reform  seeks  to  extend  the  helping  hand,  but  does  not 
reshape  the  institutions  of  the  economic  order  in  such  ways 
as  to  insure  the  institutional  elimination  of  the  difficulties. 
Reform  is  often  subject  to  the  defects  common  to  all  wel- 
fare work.  It  is  in  the  nature  of  public  benevolence  rather 
than  of  self-expression.  As  long  as  the  status,  powers  and 
rights  of  the  various  classes  in  economic  organization  re- 
main substantially  unchanged,  the  reform  movement  neces- 
sarily works  near  the  surface  of  things.  It  is  useful  and 
indispensable,  but  faces  certain  limits  of  effectiveness. 

Moreover,  it  is  true  of  a  large  class  of  reforms  that  they 
rest  upon  an  inadequate  view  of  social  psychology.  This 
class  of  reform  aims  to  give  pleasure,  safety,  comfort,  and 
happiness  to  social  groups.  Trouble  is  to  be  abolished, 
danger  and  risk  is  to  be  eliminated,  war  and  struggle  to  be 
ended,  minimums  of  food  and  luxuries  to  be  guaranteed, 
poverty  to  be  wiped  out,  fear,  oppression  and  autocracy  to 
be  destroyed.  The  new  age  that  this  type  of  reform  looks 
forward  to  is  one  of  contentment,  harmlessness,  leisure, 
gentleness,  kindness,  and  security.  All  of  this  is  to  be  a 
gift,  coming  from  reform  leagues  and  societies,  or  from 
acts  of  legislation.  But  such  a  state  of  peace  and  piety  and 
plenty  offers  no  satisfaction  to  many  of  the  basic  instincts 
of  human  nature.  Men  and  women  do  not  want  gifts  of 
pleasure;  they  want  opportunities  to  win  economic  and 
social  advance  by  the  assertion  of  their  own  human  powers. 
Men  and  women  need  a  cause  which  they  can  be  devoted  to, 
and  through  loyalty  to  the  cause,  through  struggle  for  the 
cause,  through  self-sacrifice  and  heroism  and  hazard  for  the 
cause,  they  desire  to  win  and  create  their  own  betterment. 
The  victories  and  rewards  which  come  from  self-assertion 


482  Public  Control 

are  real.  Men  need  challenges  to  invent  new  social  and 
economic  principles  and  measures,  and  need  opportunities 
to  hew  out  progress  by  the  strokes  of  their  own  hands.  The 
society  often  portrayed  by  a  certain  class  of  reformers  is  a 
complacent  haven  of  refuge,  but  men  cannot  live  the  strenu- 
ous life  in  such  a  society,  and  anything  short  of  the  strenu- 
ous life  cannot  satisfy  the  deepest  instincts  of  human 
nature.  Reform  movements  of  this  kind  largely  ignore  the 
fundamental  human  cravings  for  zest,  risk,  responsibility, 
self-achievement,  group  loyalty,  resourcefulness,  sacrifice, 
domination,  power,  struggle,  conquest.  Of  course  the 
sounder  reform  movements  avoid  the  mistaken  social  psy- 
chology of  ease  and  comfort,  but  it  is  important  that  the 
bulk  of  reform  effort  should  rest  upon  a  correct  interpreta- 
tion of  human  nature.  Reform  in  the  deepest  sense  of  the 
word  should  mean  not  merely  a  gift  from  society  to  needy 
groups,  but  an  organization  of  opportunity  for  self-achieve- 
ment, and  for  group  advancement  by  the  creative  effort  of 
all  members  of  the  group. 

The  spirit  of  reform  is  a  splendid  reflection  of  the 
genuine  feeling  of  human  kindness,  and  the  harvest  of  such 
a  spirit  certainly  commands  admiration.  Not  a  few  groups 
in  society  are  deficient  in  the  virile  instincts  and  the  powers 
of  self-assertion  and  achievement,  and  the  protecting  care 
of  society  over  them  is  an  indication  of  a  high  state  of 
civilization.  There  is  no  disparagement  of  the  inner  value 
of  reforms  as  a  whole,  in  pointing  out  some  of  the  limits 
under  which  certain  classes  of  reform  have  worked  in  the 
past  or  in  indicating  the  misleading  notions  of  human 
nature  which  underlie  certain  reform  movements.  The  gist 
of  these  remarks  is  that  a  reconstruction  of  reform  pro- 
grams that  would  reckon  more  positively  with  the  limits  of 
reform  effort  and  that  would  incorporate  the  scientific  prin- 
ciples of  modern  social  psychology  would  greatly  increase 
their  power  and  usefulness. 

Public  Opinion  and  Public  Control 

References  have  been  made  to  the  power  of  public 
opinion  as  a  means  of  effecting  fair  business  practices  under 


Public  Control  483 

the  administration  of  the  Federal  Trade  Commission  and  as 
a  means  of  enforcing  decisions  bearing  upon  labor  disputes. 
Public  opinion  is  commonly  thought  of  as  an  opinion 
•which  is  right.  Pitiless  publicity  is  often  suggested  as  a 
measure  for  bringing  about  adequate  remedies  of  economic 
wrongs  and  troubles.  And  it  is  ordinarily  obsei-ved  that 
an  economic  policy  cannot  long  endure  or  a  method  of 
government  control  prove  effective  unless  it  can  secure  the 
support  of  public  opinion.  It  is  appropriate,  therefore,  to 
give  some  analysis  to  the  function  and  behavior  of  public 
opinion  in  economic  matters. 

First  of  all,  public  opinion  is  scarcely  competent  to  pass 
upon  technical  economic  issues.  On  matters  of  business 
ethics  or  of  labor  grievances,  public  opinion  is  swayed  pri- 
marily by  head  lines,  and  only  very  remotely  by  the  body 
of  technical  facts  which  bear  upon  the  issue.  For  instance, 
a  federal  judge  who  would  dissolve  a  corporation  on  the 
basis  of  what  he  had  read  about  it  in  the  newspapers,  or  an 
arbitrator  who  would  decide  a  wage  dispute  from  his 
knowledge  of  the  press  headlines,  would  be  obviously  dere- 
lict in  his  duties  because  he  would  be  acting  without  any- 
thing like  adequate  evidence.  Yet  the  judge  or  the  arbi- 
trator would  be  acting  upon  exactly  the  same  evidence  as 
serves  to  form  public  opinion.  The  broad  spirit  of  public 
opinion  as  it  might  relate  to  the  Tightness  or  wrongness  of 
profiteering  or  of  a  certain  standard  of  living  as  a  basis  for 
wage  adjustments,  would  have  real  value,  but  the  deter- 
mination in  any  particular  case  of  what  per  cent,  of  profit 
is  profiteering  would  rest  upon  a  technical  analysis  of 
capitalization,  invested  capital  and  other  matters  of  fact, 
and  the  determination  of  a  living  wage,  or  what  wage  would 
assure  the  proper  standard  of  living  would  rest  upon  a  tech- 
nical analysis  of  statistics  of  prices  and  cost  of  living,  of 
family  budgets,  and  similar  facts.  Clearly,  the  determina- 
tion and  analysis  and  interpretation  of  such  evidence  is 
beyond  the  competence  of  public  opinion. 

From  another  standpoint,  public  opinion  is  not  allowed 
to  form  itself  freely,  without  bias  or  misbalanced  informa- 
tion.   The  Federal  Trade  Commission  gave  publicity  to  its 


484  Public  Control 

findings  about  the  profits  of  the  meat  packers,  hoping  that 
public  opinion  would  eliminate  profiteering.  The  meat 
packers  countered  by  running  expensive  advertising  in  the 
newspapers  and  spreading  broadcast  pamphlets  to  inform 
the  public  that  their  profit  amounted  only  to  a  small  frac- 
tion of  one  cent  out  of  every  dollar  of  sales.  As  a  result, 
the  publicity  of  the  Federal  Trade  Commission  was  neu- 
tralized and  public  opinion  was  confused  and  ineffective. 
Business  concerns  or  labor  organizations  which  have  in- 
terests at  stake  conceive  it  to  be  their  right  and  duty  to  use 
every  effort  to  shape  public  opinion  in  the  direction  which 
they  desire.  Hence  there  has  developed  the  modern  art  of 
propaganda.  People  who  once  doubted  the  power  of  propa- 
ganda had  those  doubts  removed  during  the  war  by  the 
obvious  effects  of  war  propaganda.  Since  the  war,  nearly 
every  large  corporation  has  a  publicity  official  whose  duty 
it  is  to  spread  broadcast  information  of  a  nature  to  win  the 
good  will  of  the  public ;  and  labor  organizations  from  time 
to  time  have  announced  the  appropriation  of  huge  sums  to 
be  devoted  to  arousing  a  sympathetic  public  opinion. 
Publicity  in  such  cases  is  a  refined  name  for  propaganda. 
The  public  stands  between  a  cross-fire  of  propaganda,  and 
it  would  be  amazing  if  the  perfectly  human  public  did  not 
reflect  this  situation  in  its  opinion  on  important  matters. 
Propaganda  takes  advantage  of  every  known  device  of  irra- 
tional appeal,  of  unconscious  suggestion,  of  instinct  excita- 
tion, and  the  value  of  public  opinion  as  a  help  in  settling 
baffling  problems  has  to  be  discounted  to  the  extent  that 
propaganda  is  misleading. 

Public  opinion  as  an  arbiter  of  disputes  between  labor 
and  capital  is  subject  to  all  these  limitations  in  degrees 
which  vary  from  case  to  case.  Doubtless  in  most  labor 
disputes  the  superior  power  of  propaganda  lies  with  em- 
ployers. Often  employers  carry  large  advertisements  in 
the  daily  press  during  a  time  of  strike,  to  arouse  public 
opinion  in  their  behalf.  More  important  than  this,  the 
whole  social  philosophy  and  economic  background  of  news- 
paper managers  and  editors  tends  to  make  them  uncon- 
sciously the  allies  in  sympathy  and  reasoning  with  em- 


Public  Control  485 

ployers  and  naturally  their  headlines  and  editorials  tend  to 
reflect  their  fundamental  and  unconscious  bias.  Charges 
are  often  made  that  newspapers  are  intimidated  by  busi- 
ness men  who  patronize  their  advertising-  columns  into  pub- 
lishing only  news  favorable  to  their  interests,  but  such 
charges  are  rarely  proved  by  concrete  evidence.  Beyond 
these  considerations  lies  the  fact  that  in  the  very  nature  of 
public  psychology  the  primary  concern  of  the  public  is  un- 
interrupted operation  of  business.  The  public  wants  peace 
and  quiet,  order  and  smoothness.  The  public  as  a  rule 
would  rather  have  industrial  peace  at  almost  any  price 
than  arouse  itself  to  a  study  of  troublesome  conditions  and 
to  a  careful  act  of  industrial  reconstruction.  The  public 
wants  to  be  let  alone ;  hence  it  is  ordinarily  the  ally  of  the 
status  quo  in  industry.  Labor  comes  with  the  sword  and 
attacks  the  status  quo.  Most  labor  demands  are  for  a 
change.  Labor  is  on  the  aggressive  and  just  as  in  interna- 
tional warfare  the  nation  which  starts  the  trouble  alienates 
the  sympathy  of  neutrals,  so  in  industrial  disputes,  the 
group  which  starts  the  dispute  and  takes  the  initiative 
tends  to  alienate  the  sympathy  of  neutral  public  opinion. 
Neutral  opinion  usually  sympathizes  with  whomever  is  on 
the  defensive  and  turns  against  whomever  is  on  the  offen- 
sive. In  most  industrial  disputes,  capital  is  on  the  defen- 
sive and  labor  on  the  offensive.  It  results  therefore  that 
the  weight  of  public  opinion  tends  to  the  maintenance  of 
things  as  they  are.  It  is  marked  more  by  a  leaning  toward 
habit,  custom  and  inertia  than  toward  newness  of  thinking, 
alteration  of  conditions,  and  change  of  policy.  From 
labor's  standpoint,  the  public  wants  peace  more  than  jus- 
tice, and  industrial  quiet  more  than  the  active  righting  of 
industrial  wrongs.  These  limits  to  the  value  of  public 
opinion  in  industrial  disputes  need  to  be  recognized  when 
opinion  is  assigned  the  role  of  arbiter  between  labor  and 
capital. 

This  account  of  the  case  should  not  be  allowed  to  belittle 
unduly  the  true  importance  of  public  opinion  in  the  role 
■which  it  is  competent  to  play.  The  public  is  the  injured 
party  in  industrial  struggles  and  its  determination  to  pro- 


486  Public  Control 

teet  itself  from  unjust  interruption  of  business  service  de- 
serves right  of  way.  The  ideas  in  the  mind  of  the  common 
man  deserve  deep  respect,  and  there  is  no  intention  here  to 
repudiate  public  opinion  as  a  useful  force  in  the  control  of 
modern  business.  But  the  limits  of  public  opinion  need  to 
be  taken  into  account ;  its  natural  lethargy  and  inertia  rec- 
ognized; its  vulnerability  to  the  skilled  presentation  of 
propaganda  understood;  and  its  unconscious  social  and 
economic  bias  properly  measured.  Public  opinion  on  eco- 
nomic issues  needs  constant  education  and  leadership, 
needs  to  be  aroused  by  responsible  authorities  and  informed 
by  agencies  which  are  interested  in  true  publicity  rather 
than  mere  propaganda.  The  estimate  of  public  opinion 
by  Viscount  James  Bryce  in  his  work  on  Modern  Democ- 
racies states  the  matter  in  admirable  proportions:  "The 
value  of  public  opinion  depends  on  the  extent  to  which  it 
is  created  by  that  small  number  of  thinking  men  who  pos- 
sess knowledge  and  the  gift  of  initiative,  and  on  the  extent 
to  which  the  larger  body,  who  have  no  initiative  but  a 
shrewd  judgment,  co-operate  in  diffusing  sound  and  tem- 
perate views  through  the  community,  influencing  that  still 
larger  mass  w^ho,  deficient  in  knowledge  and  in  active  in- 
terest, follow  the  lead  given  to  them.  .  .  .  Two  dangers 
threaten  ...  all  modern  democracies.  One  is  the  ten- 
dency to  allow  self-interest  to  grasp  the  machinery  of  gov- 
ernment and  turn  that  machinery  to  its  ignoble  ends.  The 
other  is  the  irresponsible  power  wielded  by  those  who  sup- 
ply the  people  with  the  materials  they  need  for  judging 
men  and  measures.  That  dissemination  by  the  printed 
word  of  untruths  and  fallacies  and  incitements  to  violence 
which  we  have  learned  to  call  propaganda  has  become  a 
more  potent  influence  among  the  masses  in  large  countries 
than  the  demagogue  ever  was  in  the  small  peoples  of  former 
days.  To  combat  these  dangers  more  insight  and  sym- 
pathy, as  well  as  more  energy  and  patriotism,  are  needed 
than  the  so-called  upper  and  educated  classes  have  hitherto 
displayed,"^ 

1  Pp.  456-457,  459-400.     See  Chapters  XV  and  LXVII. 


CHAPTER  XII 
ECONOMIC    RADICALISM 

There  exists  in  every  economic  organization  a  group  of 
people  who,  because  of  certain  characteristics  which  are 
more  or  less  common  to  them,  come  to  be  looked  upon  by  the 
rest  of  the  economic  organization  as  "radicals."  Some  of 
the  most  noticeable  characteristics  of  the  members  of  rad- 
ical groups  may  be  outlined  briefly  as  follows:  (1)  The 
evils  and  faults  of  society  look  bigger  to  them  than  to  the 
average  person ;  wrongs  tower  into  outrages,  economic  de- 
fects cry  out  with  indecencies,  and  the  troubles  and  wants 
of  the  less  fortunate  classes  of  society  loom  up  into  atro- 
cious evils  and  glaring  crimes  against  humanity.  (2) 
Radicals  as  a  rule  are  more  impatient  for  correction  of 
economic  faults  than  the  average  person.  Delay  is  in  their 
eyes  criminal  procrastination,  and  the  faults  of  society  re- 
quire quick  and  effective  action.  (3)  Radicals  as  a  group 
place  great  stress  upon  the  right  of  freedom  of  thought, 
freedom  of  the  press,  freedom  of  speech,  and  freedom  of 
agitation.  The  vocabulary  of  radicalism  emphasizes  and 
re-emphasizes  the  word  freedom  from  first  to  last, — a  per- 
fectly natural  rationalization  of  their  burning  desire  to  be 
immune  from  restraint  in  preaching  and  spreading  the 
doctrines  of  radicalism.  (4)  Radicals  demand  changes 
which  are  more  drastic  and  overhauling  than  appeal  to  the 
ordinary  man.  They  look  upon  mild  reforms  and  ordinary 
reconstruction  as  mere  patchwork ;  what  they  want  is  a 
transformation  of  society,  a  remaking  of  fundamentals,  a 
complete  remodeling  of  economic  structure.  (5)  Radicals 
give  every  appearance  of  feelings  of  bitterness  and  hate 
toward  classes  who  stand  in  their  way.  They  dwell  upon 
pictures  of  the  class  war,  and  the  class  struggle,  and  antici- 
pate the  destruction  of  a  class  of  oppressors.    For  the  mass 

487 


488  Economic  Radicalism 

of  people,  for  the  labor  groups  especially,  they  evince 
genuine  love  and  sympathy,  and  this  is  all  the  stronger 
reason  why  they  show  hatred  of  oppressors.  (6)  They 
look  forward  to  an  organization  of  economic  society  in 
which  group  action  shall  predominate,  and  collective  and 
co-operative  institutions  shall  supersede  private  business. 
Political  groups  and  non-political  co-operative  groups  com- 
pose the  anticipated  structure  of  their  rebuilt  economic 
society.  (7)  Kadicals  place  great  faith  in  the  willingness 
of  the  individual  under  the  radical  regime  to  subordinate 
self-motives  to  social  motives,  and  to  abandon  desires  for 
selfish  acquisition  or  aggrandizement  in  order  to  make  way 
for  motives  of  public  service  and  the  common  good.  It  is 
foretold  that  under  the  radical  regime  public-spiritedness 
wall  be  paramount. 

These  characteristics  of  radicals  naturally  set  off  the 
people  who  hold  them  as  unique  and  queer,  and  as  dif- 
ferent and  dangerous.  Some  people  feel  that  the  only  ade- 
quate treatment  for  such  specimens  of  humanity  is  to  jail 
them,  lynch  them,  shoot  them,  or  deport  them.  There  come 
from  time  to  time  waves  of  popular  feeling  when  this  atti- 
tude takes  possession  of  nearly  the  whole  of  society.  Such 
an  outburst  of  public  feeling  came  during  the  years  imme- 
diately following  the  "World  War.  Even  during  these  waves 
of  feeling,  however,  there  are  certain  groups  which  take 
the  stand  that  radical  doctrines  are  after  all  not  harmful 
if  they  are  treated  intelligently,  and  that  if  radicalism  is 
empty  and  has  no  basis  in  fact,  it  will  die  a  natural  death, 
or  will  draw  an  insignificant  band  of  followers,  while 
if  it  has  any  basis  in  fact,  society  can  quietly  and  in  an 
orderly  manner  correct  the  wrongs,  and  thereby  draw  the 
sting  out  of  radicalism.  In  ordinary  times,  the  group  of 
people  who  act  upon  this  interpretation  of  the  radical 
movement  are  usually  the  predominant  group. 

There  are  distinguishable  shades  or  degrees  of  radical- 
ism. Some  are  moderate  and  patient,  and  although  they 
believe  in  drastic  changes,  they  are  willing  to  take  time  in 
reaching  them.  Economic  evolution  is  their  principle  of 
action.    Others  speak  of  evolutionary  revolution,  indicating 


Economic  Radicalism  489 

that  they  want  revolutionary  changes  in  economic  struc- 
ture, and  although  they  will  proceed  by  law  and  order  to 
secure  the  changes,  yet  at  the  same  time  they  will  hurry  up 
the  process  of  evolution,  and  speed  the  day  of  drastic  trans- 
formation with  all  their  might  and  main.  Others  plan  for 
a  great  upheaval,  for  a  bloodless  revolution,  for  the  seizure 
of  all  things  by  the  emancipated  classes  and  the  surrender 
of  the  oppressors.  And  still  others  deliberately  calculate 
on  force  and  violence  as  the  means  of  overthrow  of  the 
capitalist  power  and  the  rule  of  the  working  classes  every- 
where. 

Radicalism  has  not  merely  its  various  shades  and  degrees, 
but  also  its  various  parties,  or  schools  of  thought.  Radical- 
ism is  about  synonymous  to  most  people  with  socialism, 
but  socialism  and  radicalism  have  so  many  divisions  and 
parties  that  it  is  difficult  to  give  the  common  essence  of 
them  all.  The  case  is  somewhat  as  in  religion,  where  a 
great  number  of  denominations,  factions  and  groups  ap- 
pear, and  the  interpretation  of  religion  made  by  each  is 
different  from  that  made  by  any  other.  Hence,  it  is  more 
illuminating  than  a  definition  to  state  that  all  branches  of 
radicalism  partake  in  some  shade  and  degree  of  the  main 
characteristics  of  radicalism  which  were  drawn  up  at  the 
beginning  of  this  section.  Some  of  the  main  branches  and 
their  main  individual  peculiarities  will  be  listed  below. 

1.  State  socialism  looks  toward  state  ownership  and  oper- 
ation of  the  main  industries  of  the  country  by  a  political 
government  which  has  eliminated  the  capitalist  classes  from 
power.  The  German  experiments  in  state  ownership  and 
operation  before  the  World  War  were  state  capitalism 
rather  than  state  socialism  in  the  strict  sense  of  the  term. 
State  capitalism  is  often  considered  by  socialists  as  a  step- 
ping-stone toward  state  socialism.  It  is  state  socialism 
which  is  dominant  in  the  American  Socialist  Party.  The 
Non-Partisan  League  of  North  Dakota  exhibited  the  initial 
stages  of  state  socialism,  with  state-owned  grain  elevators, 
state  banks,  and  the  like.^ 

1  Its  leadinof  officers  were  recalled  by  vote  of  the  state  electorate 
in  the  fall  of  1921. 


490  Economic  Radicalism 

2.  Guild  socialism  proposes  a  dual  organization  of  pol- 
ities and  industry,  under  which  each  branch  of  industry- 
would  govern  its  own  productive  activity  through  the  or- 
ganization of  its  workers,  while  co-ordination  of  the  various 
branches  of  industry  would  be  accomplished  through  the 
control  of  the  democratic  state.  The  workers  would  elect 
committees  and  councils  to  assume  the  leadership  in  pro- 
duction, and  each  branch  of  industry  would  thus  put  the 
control  and  operation  of  its  own  production  in  the  hands 
of  its  workers.  The  state,  representing  more  particularly 
consumers,  would  be  a  mediating  and  harmonizing  agency, 
to  effect  proper  adjustments  between  the  several  producers' 
organizations,  and  to  protect  the  interests  of  society  as  a 
whole.  The  proposed  Plumb  plan  for  operation  of  the 
American  railroads  comes  the  nearest  to  the  principles 
of  Guild  socialism  of  any  project  that  is  well  known  to 
this  country,  but  the  main  stronghold  of  Guild  socialism 
is  among  certain  influential  intellectual  groups  of  Great 
Britain. 

3.  Marxian  Socialism  refers  to  socialistic  schemes  based 
upon  the  doctrines  of  a  German  economist  of  the  nine- 
teenth century,  Karl  Marx.  The  essence  of  Marx's  social- 
istic principles  was  that  the  chief  forces  in  the  shaping  of 
economic  and  social  policies  are  economic  and  materialistic 
forces.  Economic  forces  would  in  the  long  run  be  the 
undoing  of  capitalism  itself,  for  concentration  in  industry 
would  steadily  grow  greater  and  greater,  and  this  would 
ever  more  sharply  divide  workers  from  capitalists.  A  class 
feeling  would  grow  sharper  and  sharper,  the  greediness  of 
the  big  capitalists  would  bring  increasing  misery  to  the 
workers,  and  the  class  war  would  eventuate.  In  the  class 
war  the  workers  would  unite  and  strip  the  capitalist  ex- 
ploiters of  their  property  and  decree  that  land  and  capital 
should  be  owned  in  common. 

4.  Parliamentary  socialism  refers  to  socialism  which 
aspires  to  gradual  progress  by  securing  the  passage  of  re- 
form laws  through  parliaments,  congresses,  and  legisla- 
tures. The  Fabian  .socialists  of  England  are  the  prominent 
representatives  of  this  type  of  socialism,  although  almost 


Economic  Radicalism  491 

every  type  of  socialism  contains  some  degree  of  parliamen- 
tary tactics. 

5.  Syndicalism  is  a  branch  of  socialism  which  exalts 
the  organization  of  the  producers  in  each  line  of  industry 
as  the  supreme  form  of  economic  institution.  Instead  of 
using  parliamentary  tactics  as  a  means  to  attaining  power, 
syndicalists  would  use  trade  union  tactics.  Syndicalists 
believe  in  using  trade  unions  as  agencies  of  direct  action 
by  industrial  methods.  Direct  action  includes  sabotage, 
i.e.,  spoiling  machinery  or  product  as  a  means  of  revenge 
upon  employers;  boycotts  and  labels;  and  most  important 
of  all,  strikes.  The  day  is  looked  forward  to  when  the 
workers  in  one  big  union  will  declare  the  General  Strike 
against  the  whole  capitalist  structure,  and  with  the  over- 
turn of  capitalism  will  win  control  of  all  industry.  The 
center  of  syndicalism  is  in  French  labor  circles,  but  a 
group  of  American  syndicalists  have  sprung  up  inde- 
pendently, under  the  title  of  the  Industrial  Workers  of  the 
"World.  Their  strength  as  a  direct  organization  dwindled 
greatly  in  America  during  and  following  the  war,  but  men 
imbued  with  their  doctrines  penetrated  the  organizations 
of  ordinary  trade  unions  in  a  great  many  cases,  although 
the  extent  of  this  penetration  is  practically  impossible  to 
estimate  with  any  degree  of  accuracy. 

6.  Communism  is  a  form  of  socialism  which  pools  the 
earnings  and  ownings  of  people,  and  divides  the  common 
fund  on  some  such  basis  as,  for  example,  to  each  according 
to  his  needs. 

7.  The  Soviet  is  the  name  given  to  the  form  of  political 
machinery  which  has  been  established  in  the  Russian 
socialistic  experiment.  The  socialism  which  has  been  tried 
out  in  Russia  has  been  a  peculiar  combination  of  some  of 
the  main  principles  of  Karl  Marx,  of  communism  among 
peasants  and  workers,  of  opportunistic  tactics  to  meet  mil- 
itary and  industrial  crises,  and  of  the  dictatorship  of  a 
small  minority  of  the  proletariat  over  the  bulk  of  the  pop- 
ulation. Bolshevism  is  the  creed  of  the  political  party 
which  is  in  power,  and  has  the  same  relation  to  the  Soviet 
as  the  political  party  in  power  in  a  democratic  state  has 


492  Economic  Radicalism 

to  the  general  political  organization  of  democracy.  The 
effort  to  install  communism  proved  incompatible  with  the 
human  nature  of  the  Russian  peasants  and  workmen,  and 
the  leaders  of  the  Bolshevist  party  have  given  up  the 
attempt  to  establish  communism  as  a  part  of  their  social- 
istic undertaking.  They  have  returned  to  a  mixture  of 
government  operation  of  some  enterprises,  of  government 
control  of  others,  of  co-operative  producers'  societies,  and 
of  leasing  of  industries  to  individuals  to  be  conducted  as 
under  capitalism  by  private  initiative  and  ability.  The 
Russian  experiment  has  been  marked  by  periods  of  violence 
and  bloodshed  which  have  outlawed  it  in  the  sympathies 
of  the  onlooking  world,  and  its  administrative  inefficiencies 
and  economic  demoralization  have  alienated  the  public 
opinion  of  all  democratic  countries. 

Economic  Analysis  of  Socialistic  Proposals 

It  should  be  realized  that  radicalism  and  socialism  are 
problems  that  call  for  painstaking  scientific  analysis,  rather 
than  mere  emotional  excitement  and  impassioned  vituper- 
ation. Large  numbers  of  people  are  accustomed  to  dwell 
upon  these  particular  problems  with  a  great  deal  of  mental 
heat,  but  very  little  mental  light.  Nothing  is  more  common 
than  for  people  who  are  too  lazy  to  think  to  condemn  all 
proposals  for  advance  and  improvement  as  radical,  as  if 
blindly  placing  that  label  upon  a  vaguely  conceived  project 
were  the  end  of  the  whole  matter.  A  study  of  economics 
ought  above  all  things  else  to  teach  a  person  to  discriminate 
between  proposed  changes  on  their  merits,  and  to  be  im- 
mune from  the  capricious  tendency  of  many  people  to 
brand  every  project  as  ''red"  which  they  do  not  feel 
inclined  to  think  about.  Vehement  denunciation  is  not  a 
substitute  for  intelligent  analysis  of  radical  proposals. 

The  analysis  of  socialistic  proposals  may  be  divided  into 
two  main  parts,  institutional  and  psychological.  One  basic 
institutional  difficulty  in  all  socialistic  proposals  is  the  diffi- 
culty of  preserving  economic  efficiency  under  the  enormous 
administrative  machinery  of  the  socialistic  organization. 
In  previous  pages  attention  was  given  to  the  question  of 


Economic  Radicalism  493 

the  most  efficient  size  of  business  combinations  in  various 
lines  of  industry  and  commerce.  It  was  observed  that  in 
nearly  all  branches  of  economic  activity  there  is  a  limit  to 
the  size  of  business  unit  which  can  attain  maximum  effi- 
ciency. This  limit  exists  even  in  lines  of  industry  where 
standardized  mechanical  processes  predominate,  but  it  is 
especially  narrow  in  lines  of  industry  where  the  human 
element  predominates.  Every  increase  in  size  beyond  the 
point  of  maximum  efficiency  results  in  diminishing  effi- 
ciency. The  law  of  diminishing  returns  operates  in  spite 
of  all  that  leaders  of  great  genius  can  do,  and  after  a  cer- 
tain point  of  expansion  is  reached,  the  task  of  organizing 
the  personnel  of  big  enterprises,  and  of  stimulating  ade- 
quate incentives  and  motives  to  efficiency  and  exertion 
becomes  too  great.  Socialistic  proposals  usually  ignore 
this  basic  economic  difficulty,  which  is  established  in  the 
very  nature  of  modern  technical  industry  and  modern 
administration  of  large  groups  of  workers;  and  optimisti- 
cally take  it  for  granted  that  the  socialistic  administration 
of  industry,  which  would  involve  economic  consolidation 
and  concentration  far  beyond  anything  yet  known  in  pri- 
vate business  concentration,  would  be  immune  from  the 
difficulties  of  overwhelming  size. 

A  second  institutional  difficulty  under  socialistic  projects 
is  the  difficulty  of  economic  discipline.  Under  almost  every 
form  of  political  administration  yet  experimented  with, 
the  spirit  of  the  political  agents  has  made  political  admin- 
istration a  byword  for  indifference,  slacking,  and  the  desire 
to  get  something  for  nothing.  No  form  of  discipline  has 
proved  workable  in  political  large  scale  organization  which 
would  secure  the  same  attention  to  duty  and  performance 
of  responsibility  as  is  attainable  under  the  moderate  sized 
private  business.  The  capacity  to  hold  men  to  their  tasks, 
to  bend  their  energies  effectively  toward  productive  work, 
and  to  fasten  their  motives  and  instincts  and  thoughts 
adequately  upon  the  handling  of  their  jobs  is  exercised 
none  too  satisfactorily  in  the  moderate  sized  private  bus- 
iness, where  the  size  of  the  business  permits  direct  super- 
vision of  labor  and  where  the  unyielding  exactions  of  work 


494  Economic  Radicalism 

done  for  pay  received  can  be  enforced.  Referring  partic- 
ularly to  Guild  socialism,  but  using  words  which  apply 
equally  to  all  socialistic  programs,  Alfred  Marshall  aptly 
writes,  "In  the  present  economic  system,  discipline  is  en- 
forced in  great  measure  automatically  'by  an  unseen 
hand.'  It  is  often  rather  harsh;  and  its  severity  calls  for 
frequent  mitigation  of  human  effort.  But  if  automatic 
discipline  is  removed,  an  all-pervading  authority  must  be 
invoked  to  check  abuse  in  small  matters  as  well  as  in  large. 
Unless  Guild  organization  develops  some  notion,  of  which 
it  at  present  seems  to  have  made  no  forecast,  it  may  prob- 
ably drift  into  chaos,  from  which  relief  can  be  found  only 
in  a  military  despotism."^  With  the  abandonment  of  the 
traditions,  customs  and  habits  which  now  attend  upon  the 
workers '  attitude  toward  dismissal,  promotion,  and  efficiency, 
a  new  technique  would  have  to  be  created,  and  a  new 
habituation  of  labor  psychology  developed,  and  none  of 
the  writings  of  socialists  up  to  date  give  anything  like 
satisfactory  assurance  that  the  transformation  of  institu- 
tional discipline  would  avoid  the  chaos  of  which  Marshall 
speaks. 

A  third  institutional  difficulty  in  socialistic  enterprise 
has  to  do  with  the  problems  of  leadership.  The  history  of 
politics  indicates  that  the  qualities  of  character  which 
make  a  man  popular  with  the  mass  of  voters  are  not  always 
the  same  qualities  of  character  which  make  a  man  an  effi- 
cient executive  and  administrator.  The  glad  hand,  genial- 
ity, the  broad  smile,  spectacular  achievement,  pull  with 
the  political  machine,  and  similar  qualities  play  a  great 
part  in  the  popular  election  of  mayors,  legislators,  gover- 
nors, and  even  of  presidents.  The  expert,  the  technical 
specialist,  the  qualified  executive,  the  trained  administrator 
finds  it  next  to  impossible  to  compete  in  elections  with  the 
"man  of  the  people."  Private  business  has  the  virtue  of 
bringing  men  of  great  executive  ability  into  positions  of 
responsibility  and  power,  and  there  is  no  assurance  that 
the  socialist  democracy  of  economic  control  and  operation 
would  secure  the  same  qualifications  in  leadership.   Human 

1  "Industry  and  Trade,"  p.  600. 


Economic  Radicalism  495 

nature  in  politics  is  not  such  as  to  make  one  hopeful  of 
the  economic  leadership  of  the  socialistic  order/ 

A  fourth  institutional  difficulty  concerns  itself  with  the 
apathy  of  the  average  man.  In  their  enthusiasm  the 
socialists  assume  that  the  average  man  is  on  his  tiptoes, 
straining  at  the  leash,  ready  to  plunge  into  the  responsi- 
bilities of  socialistic  economic  democracy.  They  picture 
the  common  worker  as  a  human  being  who  will  spring  into 
activity  as  soon  as  socialistic  democracy  is  declared,  and 
who  will  be  on  duty  at  all  times,  alert  and  eager,  taking 
a  man's  part  in  the  conduct  of  economic  affairs.  But  the 
average  worker  is  an  indifferent  individual,  and  it  is  exceed- 
ingly difficult  to  maintain  for  any  length  of  time  his  aroused 
interest  in  political  and  economic  problems.  Interest  and 
action  require  exertion  of  mind  and  body,  and  the  ordinary 
individual,  after  the  first  snatch  of  novelty  is  past,  falls 
into  an  easy-going  inertia.  The  direct  primary  has  been 
a  disappointment  to  most  of  its  sponsors  because  voters 
proved  too  indifferent  to  bother  going  to  the  polls  to  use 
it.  The  ordinary  town  caucus  is  attended  by  only  a  hand- 
ful of  men,  and  delegates  to  a  nominating  convention  enjoy 
the  trip  and  are  proud  of  the  experience,  but  are  relieved 
to  have  the  pain  of  thinking  out  a  compromise  candidate 
left  to  a  handful  of  inside  politicians.  Votes  on  vital  eco- 
nomic questions  under  the  socialistic  plan  would  surely  be 
cast  by  an  active  minority ;  elections  of  leaders  would  bring 
tedium  and  boredom ;  attendance  at  meetings  would  become 
a  routine  aggravation ;  and  the  tactics  of  controlling  polit- 
ical interests  in  the  economic  commonwealth  would  perme- 
ate the  system.  The  present  intellectual  equipment  and 
training  of  millions  of  workers,  their  lack  of  experience 
in  responsible  economic  citizenship,  their  unsteady  interest 
in  vital  economic  and  political  issues  make  a  dubious  pros- 
pect of  the  economic  society  of  socialism.  The  load  of 
intelligent  responsibility  which  socialistic  programs  en- 
trust to  the  masses  of  workers  is  a  bad  institutional  ar- 
rangement. 

1  See  Graham  Wallas,  "Iluinan  Nature  in  Politics." 


496  Economic  Radicalism 

The  paramount  psychological  difficulty  of  the  socialistic 
commonwealth  is  one  of  incentives  and  motives.  The  mo- 
tives which  could  be  counted  upon  in  the  average  worker 
are  in  doubt.  Socialists  contend  that  the  feeling  of  being 
a  part  of  the  co-operative  commonwealth  would  stimulate 
loyalty  and  workmanship,  and  that  by  placing  the  premium 
upon  social  unity  rather  than  individual  aggrandizement, 
the  selfish  private  motives  of  capitalism  would  drop  out 
of  use,  and  public-spiritedness  would  be  realized.  Such 
an  analysis  of  human  nature  cannot  be  looked  upon  as 
other  than  a  convenient  rationalization  inspired  by  the 
hopes  and  dreams  of  the  analyst.  It  is  the  conclusion  of 
buoyant  optimism  rather  than  that  of  careful  observation 
of  human  psychology.  The  making  over  of  motives  and 
the  changing  of  forms  of  instinct  expression  is  a  gradual 
process  at  the  best,  and  involves  the  slow  accumulation  of 
folk-ways,  customs,  traditions,  habits  and  institutions.  The 
usual  socialist  doctrine  takes  the  quick  adoption  of  new 
motives  and  incentives  for  granted,  but  this  is  the  very 
difficulty  which  lies  at  the  heart  of  the  socialist  issue.  The 
motives  of  men  of  rare  ability,  of  the  potential  leaders  of 
the  economic  order  come  under  the  same  consideration  as 
the  motives  of  the  rank  and  file.  The  gradual  accommoda- 
tion of  leaders  under  the  capitalist  system  to  the  social 
requirements  of  the  last  decade  or  two  has  taken  the  form 
of  some  degree  of  adoption  of  service  motives  and  of  public- 
mindedness,  but  there  is  scant  evidence  for  the  hope  that 
the  sweeping  abolition  of  motives  of  private  acquisition 
would  result  in  the  facile  installation  of  motives  of  public 
achievement  and  public  service. 

The  easy  optimism  of  socialistic  psychology  is  quickly 
apparent  in  the  following  utterance  by  Bertrand  Russell: 
''The  world  that  we  must  seek  is  a  world  in  which  the 
creative  spirit  is  alive,  in  which  life  is  an  adventure  full 
of  joy  and  hope,  based  rather  upon  the  impulse  to  con- 
struct than  upon  the  desire  to  retain  what  we  possess  or 
to  seize  what  is  possessed  by  others.  It  must  be  a  world 
in  which  affection  has  free  play,  in  which  love  is  purged 
of  the  instinct  for  domination,  in  which  cruelty  and  envy 


Economic  Eadicalism  497 

have  been  dispelled  by  happiness  and  the  unfettered  devel- 
opment of  all  the  instincts  that  build  up  life  and  fill  it 
•with  mental  delights.  Such  a  world  is  possible;  it  waits 
only  for  men  to  wish  to  create  it."^ 

The  socialistic  institutions  that  are  proposed  place  such 
a  heavy  burden  of  responsibility  upon  the  human  nature 
of  the  average  man  as  grossly  to  overstrain  his  mental 
capacities.  The  account  of  inequalities  of  intelligence  and 
of  all  instinctive  equipment,  which  was  given  in  previous 
pages,  indicates  the  incapacity  of  the  average  man  for 
the  hea\y  responsibilities  of  the  socialistic  state.  The 
further  assumption  that  the  bulk  of  men  will  want  to 
shoulder  their  responsibilities,  that  they  will  be  purged  of 
pernicious  instinctive  tendencies  and  filled  with  idealistic 
and  creative  tendencies  overrates  human  nature.  Just  as 
many  classes  of  reform  underrate  the  strain  that  can  be  put 
upon  human  nature,  so  socialistic  projects  overrate  the 
strain  that  human  nature  will  bear.  It  may  be  that  some 
form  of  economic  democracy  can  be  developed  which  will 
adapt  the  institutions  of  industry  to  the  strain  which 
human  nature  will  bear  efficiently.  Such  an  adaptation 
of  men  to  institutions  and  of  institutions  to  men  is  the 
guiding  principle  of  economic  democracy  and  an  analysis 
of  the  principle  will  be  undertaken  in  the  final  chapter  of 
this  volume. 

In  this  whole  analysis  of  socialistic  proposals  it  would 
be  blind  prejudice  to  deny  that  a  goodly  number  of  bril- 
liant minds  are  to  be  found  among  the  leaders  of  radical 
thought.  Some  people  who  are  not  anxious  to  be  strictly 
honest  in  their  thinking  sweep  aside  all  radical  thinkers 
as  being  in  the  category  of  intellectual  inferiority.  But 
no  matter  how  much  one  may  disagree  with  the  conclusions 
of  thinkers  of  opposite  opinions,  nothing  is  gained  by  mak- 
ing light  of  their  incisive  comments  on  the  workings  of 
the  industrial  order  or  of  their  painstaking  research  and 
investigation.  Brilliance  of  intellect  is  not  missing  in 
the  radical  groups.  As  a  matter  of  fact,  difference  of  opin- 
ion becomes  sharp  only  when  there  is  some  degree  of  bril- 
1  Bertrand  Russell,  "Proposed  Roads  to  Freedom,"  p.  212. 


498  Economic  Radicalism 

liant  observation  and  inference  on  both  sides.  Socialism 
would  not  have  aroused  such  bitter  and  desperate  denun- 
ciation had  not  a  number  of  its  generalizations  disclosed 
vulnerable  sore  spots  in  the  existing  industrial  order. 
Those  people  who  want  most  to  smite  socialism  usually  do 
the  least,  for  the  simple  reason  that  their  emotional  reac- 
tions are  so  strong  that  they  lose  the  power  to  have  respect 
for  integrity  of  mind  and  incisive  comment  wherever  they 
may  be  found.  Vehement  opposition  is  not,  as  a  rule,  intel- 
ligent opposition.  To  give  due  regard  to  the  mental  power 
of  socialistic  thinkers  is  not  to  take  the  stand  that  we  must 
admit  they  are  right  just  because  they  may  be  mentally 
brilliant.  The  whole  force  of  these  remarks  is  that  effective 
analysis  of  radical  programs  must  always  endeavor  to 
estimate  the  weight  of  an  idea  at  its  actual  value. 


CHAPTER  XIII 

ECONOMIC   DEMOCRACY 

Economic  democracy  is  a  comprehensive  term  and  varied 
definitions  are  given  to  it  from  time  to  time.  The  two 
most  common  versions  of  the  term  refer  to  democratic 
control  over  industry  exercised  through  the  medium  of  the 
political  government,  and  to  democratic  control  exercised 
through  the  medium  of  some  special  form  of  organization 
within  industry  itself. 

The  first  version  of  economic  democracy  would  make  the 
term  cover  practically  all  of  the  matters  which  have  been 
already  discussed  under  the  section  on  Public  Control. 
The  American  Government  is  a  democracy,  and  when  dem- 
ocratic government  controls  and  regulates  economic  affairs, 
the  process  is  certainly  in  the  nature  of  economic  democ- 
racy. This  form  of  economic  democracy  would  include 
government  ownership  and  operation  of  industries,  and 
would,  for  instance,  include  the  Post  Office  or  the  Panama 
Canal  as  typical  illustrations  of  economic  democracy.  Cer- 
tain observers  are  disposed  to  term  such  instances  of 
government  authority  as  state  socialism,  whereas  others 
are  disposed  to  term  them  state  capitalism. 

The  dispute  over  terms  is  non-essential.  The  inclusion 
of  public  control  or  of  government  ownership  and  opera- 
tion under  economic  democracy  may  be  allowed  as  legit- 
imate. It  is  not  intended  to  analyze  this  form  of  economic 
democracy  at  this  point,  for  the  simple  reason  that  most 
of  what  has  been  said  under  Public  Control  and  under 
Radicalism  applies  to  economic  democracy  of  this  type. 
The  mechanism  of  public  control  provides  for  a  moderate 
assertion  of  democratic  power  through  the  agencies  of  the 
State,  and  the  same  mechanism  expanded  provides  for  the 
assertion  of  democratic  power  which  establishes  state  own- 

499 


500  Economic  Democracy 

ership  and  operation.  Moreover,  although  the  form  of 
democracy  under  a  capitalistic  state  and  a  socialistic  state 
would  differ  profoundly;  nevertheless,  in  either  case,  state 
ownership  and  operation  of  industry  is  subject  to  the  same 
institutional  and  psychological  difficulties  as  were  discussed 
under  Radicalism,  Consequently,  the  discussion  contained 
in  the  foregoing  sections  on  Economic  Adaptation  have  a 
direct  bearing  on  the  problems  of  economic  democracy 
attained  through  the  framework  of  political  democracy. 

The  discussion  of  this  section  has  to  do  primarily  with 
the  second  form  of  economic  democracy,  namely,  that  at- 
tained through  the  direct  organization  of  industry  itself 
on  a  democratic  principle.  Democracy  is  a  loosely  used 
watch  word  to  cover  a  host  of  economic  programs,  and  it 
is  the  general  impression  that  as  soon  as  a  program  of 
action  has  been  labelled  "Democracy,"  its  success  is  pre- 
destined. Not  a  few  economic  thinkers  voice  the  opinion 
that  political  democracy  is  already  won  in  most  modem 
countries  and  that  economic  democracy  is  the  next  great 
human  step  forward.  Assuming  that  political  democracy 
is  practically  an  unqualified  success,  they  assume  that  to 
inaugurate  the  same  structure  of  government  for  industry 
will  assure  similar  happy  results  in  that  department  of 
modern  life.  Such  an  attitude  is  uncritically  optimistic. 
It  trusts  credulously  in  some  obscure  magic  of  "Democ- 
racy" to  set  industry  at  rights,  and  grossly  overrates  the 
power  of  a  form  of  organization  to  escape  from  or  to  over- 
come the  grave  defects  of  human  nature  in  the  people  who 
live  within  the  organization  and  through  whom  it  func- 
tions. As  a  preparation,  therefore,  for  a  careful  and  crit- 
ical analysis  of  economic  democracy,  it  is  desirable  to  have 
a  correct  view  of  the  present  status  of  political  democracy. 
Probably  the  best  account  for  this  purpose  is  that  given 
by  James  Bryce  in  his  work  on  Modern  Democracies. 
The  general  scope  and  portent  of  his  conclusions  are  ad- 
mirably summarized  in  the  following  quotation :  "I  may 
here  .  .  .  sum  up  in  a  few  propositions  certain  brosd  con- 
clusions which  may  be  drawn  from  a  review  of  modem 
popular  governments.     They  are  stated  subject  to  certain 


Economic  Democracy  501 

exceptions,  already  ineutioned,  in.  the  ease  of  particular 
countries,  .  .  . 

"Democracy  has  belied  the  prophesies  both  of  its  friends 
and  of  its  enemies.  It  has  failed  to  give  some  benefits 
which  the  former  expected,  it  has  escaped  some  of  the  evils 
which  the  latter  feared.  If  the  optimistic  overvalued  its 
moral  influence,  the  pessimists  undervalued  its  practical 
aptitudes.  It  has  reproduced  most  of  the  evils  which  have 
belonged  to  other  forms  of  government,  though  in  different 
forms,  and  the  few^  it  has  added  are  less  serious  than 
those  evils  of  the  older  governments  which  it  has  escaped. 

"I.  It  has  maintained  public  order  while  securing  the 
liberty  of  the  individual  citizen. 

"II.  It  has  given  a  civil  administration  as  efficient  as 
other  forms  of  government  have  provided. 

"III.  Its  legislation  has  been  more  generally  directed 
to  the  welfare  of  the  poorer  classes  than  has  been  that  of 
other  governments. 

"IV.  It  has  not  been  inconstant  or  ungrateful. 

"V.  It  has  not  weakened  patriotism  or  courage. 

' '  VI.  It  has  been  often  wasteful  and  usually  extravagant. 

"VII.  It  has  not  produced  general  contentment  in 
each  nation. 

"VIII.  It  has  done  little  to  improve  international  rela- 
tions and  insure  peace,  has  not  diminshed  class  selfishness 
(witness  Australia  and  New  Zealand),  has  not  fostered 
a  cosmopolitan  humanitarianism  nor  mitigated  the  dislike 
of  men  of  a  different  color. 

"IX.  It  has  not  extinguished  corruption  and  the  malign 
influences  wealth  can  exert  upon  government. 

"X.  It  has  not  removed  the  fear  of  revolutions. 

"XI.  It  has  not  enlisted  in  the  service  of  the  State  a 
sufficient  number  of  the  most  honest  and  capable  citizens. 

"XII.  Nevertheless  it  has,  taken  all  in  all,  given  better 
practical  results  than  either  the  Rule  of  One  Man  or  the 
Rule  of  a  Class,  for  it  has  at  least  extinguished  many  of 
the  evils  by  which  they  were  defaced.  .  .  . 

"In  1914  there  were  signs  of  decline  in  some  countries 
where  decline  was  hardly  to  have  been  expected,  and  of 


502  Eco7iomic  Democracy 

improvement  in  other  countries,  but  nothing  to  indicate 
in  any  country  either  a  wish  to  abandon  democracy  or  the 
slightest  prospect  that  anything  would  be  gained  thereby. 
Disappointment  is  expressed,  complaints  are  made,  but 
no  permanent  substitute  has  been  suggested.  .  .  .  Within 
the  century  and  a  half  of  its  existence  in  the  modern  world 
free  government  has  passed  through  many  phases,  and  seems 
now  to  stand  like  the  traveller  who,  on  the  verge  of  a 
great  forest,  sees  many  paths  diverging  into  its  recesses 
and  knows  not  whither  one  or  other  will  lead  him."^ 

The  two  most  important  forms  of  economic  democracy 
which  command  deep  interest  at  the  present  time  are  woi*ks 
councils  and  labor  unions.  The  works  councils  are  organ- 
izations of  workers  which  are  formed,  usually,  at  the 
initiative  of  employers  and  in  which  powers  are  granted 
to  laborers  by  the  voluntary  action  of  employers.  Labor 
unions,  on  the  other  hand^  are  organizations  of  workers 
which  are  formed  at  the  initiative  of  workers  themselves 
and  in  which  powers  are  won  usually  as  grudging  conces- 
sions from  employers. 

Works  Councils 

The  essential  structure  of  the  dominant  types  of  works 
council  is  fairly  simple.  The  workers  in  a  plant  elect 
representatives  who  confer  with  representatives  of  the 
management.  Nominating  and  balloting  procedure  takes 
place  in  much  the  same  way  as  in  a  political  organization. 
The  representatives  who  are  elected  organize  as  a  body, 
with  a  chairman  and  other  officers,  and  establish  the  nec- 
essary committees  and  subcommittees  to  deal  with  special 
problems.  The  workers'  representatives  constitute  the 
works  council  or  shop  committee  and  meet  the  representa- 
tives of  the  management  in  joint  conference  for  the  dis- 
cussion of  industrial  problems  for  the  adjustment  of  griev- 
ances, and  for  general  collective  bargaining. 

These  works  councils  confine  their  attention  to  those 
phases  of  industrial  problems  which  directly  affect  the 
welfare  of  labor.  Such  problems  include,  for  the  general 
iBryce,  "Modern  Doniocraeies,"  Vol.  II,  pp.  562-563,  597-598. 


Economic  Democracy  503 

run  of  plants,  hours  of  labor,  wage  scales,  methods  of  pay- 
ment and  piece  rates.  A  large  proportion,  but  not  all, 
works  councils  deal  with  social  and  recreational  activities, 
mutual  benefit,  charity  and  relief,  welfare  work,  housing, 
co-operative  stores,  medical  care,  insurance,  education, 
Americanization,  rest  rooms,  lunch  rooms,  prizes,  work- 
ing conditions,  accident  prevention,  factory  sanitation,  and 
hygiene  of  the  workers.  A  smaller  proportion  of  the  works 
councils  deal  with  shop  discipline,  review  of  discharge, 
promotion,  hiring,  and  transfer.  Only  a  few  councils  deal 
with  the  technical  improvement  of  production  or  with  the 
problems  of  production  management.  None  are  allowed 
to  concern  themselves  with  those  phases  of  management 
centering  around  finance,  capitalization,  or  matters  which 
are  not  directly  of  importance  in  the  life  of  the  worker. 

The  power  and  authority  of  works  councils  vary  from 
company  to  company.  In  some  cases,  if  workers  and  man- 
agement fail  to  agree  on  an  issue,  it  is  referred  to  arbitra- 
tion, but  in  most  cases  it  is  referred  to  high  officials  of 
the  company  or  to  the  board  of  directors.  Representatives 
of  both  workers  and  management  vote  on  questions  and  in 
the  overwhelming  bulk  of  cases  it  is  assumed,  as  a  matter 
of  course,  that  the  voting  power  is  equal.  This  assumption 
gives  rise  to  the  theory  that  works  councils  give  workers  a 
share  in  the  management.  In  all  ordinary  events,  the 
workers  do  participate  in  the  management  of  the  affairs 
which  affect  them.  It  should  not,  however,  be  overlooked 
that  with  most  plans,  in  the  last  analysis  the  company  has 
ultimate  authority  in  its  own  hands.  Boards  of  directors 
do  not  surrender  their  ultimate  authority  in  the  event  of 
a  showdown,  but  in  the  everyday  administration  of  works 
councils,  a  spirit  of  give  and  take  and  of  sharing  in  man- 
agement is  maintained,  and  the  ultimate  location  of  author- 
ity is  ignored  as  much  as  possible.  In  fact  the  success  of 
collective  dealing  through  works  councils  depends  upon 
the  thoroughness  with  which  all  questions  as  to  the  relative 
power  of  the  two  parties,  labor  and  management,  can  be 
relegated  to  the  background.  Collective  bargaining  through 
works  councils  succeeds  only  in  so  far  as  fairness  is  sub- 


504  Economic  Democracy 

stituted  for  force  in  industrial  relations.  If  the  manage- 
ment convinces  labor  at  the  outset  that  every  principle 
and  every  detail  of  the  council  plan  are  treated  on  the  part 
of  the  company  with  perfect  justice,  candor  and  honesty, 
the  plan  is  in  a  fair  way  toward  success.  But  if  the  man- 
agement hedges,  misrepresents,  or  threatens,  the  plan  is 
almost  sure  to  collapse.^ 

Obviously,  therefore,  the  installation  of  the  machinery 
of  industrial  democracy  merely  creates  an  opportunity  for 
the  spirit  of  the  management  to  evoke  a  favorable  response 
from  labor.  The  mechanism  of  organization  itself  does  not 
insure  at  all  that  industrial  democracy  will  be  attained. 
The  importance  of  a  good  plan  of  industrial  democracy 
does  not  consist  in  any  power  of  the  plan  as  a  plan  to  secure 
industrial  democracy;  the  importance  of  the  plan  consists 
merely  in  the  fact  that  it  provides  a  channel  for  the  spirit 
of  management  to  call  out  the  spirit  of  labor.  Of  course, 
it  is  equally  necessary  that  the  spirit  of  labor  shall  be 
honest  and  fair,  and  that  labor  shall  genuinely  respond  to 
the  responsibilities  and  powers  conferred  upon  it  by  the 
works  council  plan.  But  in  most  plans  of  this  sort  the 
dynamic  genius  and  inspiration  behind  the  plans  comes 
from  management,  and  unless  management  firmly  takes  the 
initiative  in  establishing  a  basis  of  confidence  and  fairness 
the  plan  will  fail.  For  instance,  the  International  Har- 
vester Company  has  works  councils  in  twenty-four  of  its 
plants,  and  the  success  of  the  councils  varies  considerably 
over  these  plants.  The  degree  of  success  varies,  it  is  found, 
in  direct  ratio  to  the  efficiency  and  spirit  of  the  local  man- 
agement at  each  plant  in  applying  the  system  to  that  par- 
ticular plant.  Moreover,  it  is  necessary  to  have  not  merely 
the  local  superintendents  and  executives  imbued  with  the 
proper  attitude  and  understanding,  but  also  the  bosses, 
sub-bosses  and  foremen.  To  this  end,  many  companies  have 
established  training  schools  for  bosses  and  foremen,  to  ac- 
quaint them  with  the  purpose  of  the  works  council  plan, 
with  its  technique  and  with  the  new  spirit  which   it  is 

1  See  address  by  L.  W.  Wallace,  President  of  Society  of  Industrial 
Engineers,  Proceedings  of  1919. 


Economic  Democracy  505 

necessary  for  them  to  evince  if  the  plan  is  to  be  a  success. 
Finally,  workers  themselves  have  to  be  educated  to  under- 
stand the  significance  of  the  democratic  policy,  and  have  to 
receive  correct  and  adequate  information  about  the  affairs 
of  the  company  to  allay  suspicion  and  establish  confidence. 
Industrial  democracy  involves  a  technical  organization,  but 
it  also  involves, — and  this  is  imperative, — a  basic  spirit  of 
fairness  and  justice  on  the  part  of  both  labor  and  capital. 

Labor  Unions 

The  structure  of  labor  unions  has  many  variations. 
Numerous  structural  types  of  unionism  have  developed, 
and  an  observation  of  these  types  is  the  most  useful  means 
of  studying  labor  union  structure.  The  bulk  of  labor 
unions  in  the  United  States  are  of  the  "craft  type,"  i.e., 
they  are  organized  on  the  basis  of  the  occupation  or  craft 
of  the  workers.  For  each  distinct  type  of  occupation  there 
is  a  distinct  trade  union  organization.  These  craft  unions 
become  federated  in  city,  state,  regional  and  national  feder- 
ations. The  federal  groupings  aim  to  effect  a  certain  degree 
of  concerted  thought  and  policy,  but  in  fundamental  poli- 
cies and  powers  each  constituent  craft  national  retains 
its  individual  sovereignty  and  right  of  self-determination. 
A  different  and  growing  type  of  labor  union  is  organized  on 
the  basis  of  a  given  industry.  The  coal  miners'  unions  are 
the  most  impressive  illustrations  of  industrial  unions,  and 
include  in  their  scope  men  of  all  crafts,  occupations  and 
trades,  and  men  of  all  degrees  of  skill  or  lack  of  skill.  A 
minor  type  of  unionism  organizes  all  the  workers  of  a 
single  geographical  division,  regardless  of  crafts  or  indus- 
tries, into  a  single  labor  union.  The  craft,  federation,  in- 
dustrial, and  geographical  bases  of  union  organization  give 
rise  therefore  to  the  main  structural  types  of  labor  organi- 
zation in  American  industry. 

These  structural  types  provide  in  various  ways  for  the 
election  of  leaders  by  a  popular  vote  among  the  members. 
Local  units  send  delegates  to  city  or  district  or  national  or 
international  units.  The  methods  of  balloting,  the  powers 
of  members  and  of  leaders,  the  administrative  mechanism, 


506  Economic  Democracy 

all  show  immense  variations  from  industry  to  industry. 
The  essence  of  the  democratic  structure  of  all  types  and 
forms  is  that  the  rank  and  file  of  unionists  have  the  power 
to  elect  officers  and  thereby  to  express  their  opinions  on  the 
policies  and  methods  of  labor  organization.  Until  recent 
years  the  local  units  of  union  organization  were  the  domi- 
nant factors  in  the  labor  unions  of  this  country,  and  they 
jealously  safeguarded  their  local  rights  of  self-determina- 
tion in  regard  to  fundamental  policies.  Recent  years  have 
witnessed  a  powerful  movement  toward  centralization  of 
union  authority  and  influence  in  the  hands  of  the  national 
organizations.  The  weakness  of  labor  in  local  collective 
bargaining  and  its  strength  in  national  collective  bargain- 
ing, and  the  advantages  of  nationally  administered  bene- 
ficiary and  strike  funds  have  given  this  centralizing  move- 
ment a  steady  impetus.  The  locals  have  found  it  necessary 
to  preserve  and  augment  their  industrial  power  by  a  policy 
of  uniting  on  a  national  scale.  Conspicuous  forms  of  con- 
trol now  commonly  exercised  by  national  over  constituent 
local  organizations  are  found  in  the  "national  regulation 
of  admission  requirements,  the  national  control  of  strikes, 
and  the  adoption  of  national  working  rules.  "^  The  center 
of  the  brains  of  the  labor  union  movement  and  of  the  real 
power  of  leadership  exists  among  the  leaders  of  the  na- 
tional organizations,  and  the  federations  of  national 
organizations. 

The  source  of  labor  union  success  is  not  the  type  of  struc- 
ture which  allows  a  mass  labor  election,  but  is  rather  the 
aggressive  spirit  of  the  leaders  themselves.  Labor  unionism 
is  still  in  a  militant  stage  and  the  militant  type  of  leader 
tends  to  come  to  the  front  to  cope  with  the  challenge. 
Leaders  feel  it  necessary  to  be  domineering  often,  to 
manipulate  the  rank  and  file,  to  ride  rough-shod  over  mass 
suggestions  which  obstruct  efficiencj^,  and  to  take  action 
and  get  results,  meantime  bringing  the  rank  and  file  along 
as  best  they  can.  Labor  unions  can  get  nowhere  in  the 
present  industrial  struggle  by  debating  society  tactics  and 

1 G.  E.  Barnett,  Quarterly  Journal  of  Economics,  XXVII.  pp. 
455-481. 


Economic  Democracy  507 

by  constant  referendums  to  find  out  the  will  of  members. 
As  often  as  not,  members  have  no  will,  and  even  when  they 
do  have,  it  is  likely  to  be  misinformed,  shortsighted  or 
suicidal.  This  does  not  mean  that  leaders  are  irrespon- 
sible individuals,  and  contemptuous  of  the  rank  and  file; 
but  it  does  mean  that  they  face  the  imperative  need  for 
efficiency  in  dealing  with  employers  and  that  the  condi- 
tions of  efficiency  are  a  concentration  of  power  and  initia- 
tive in  the  hands  of  leaders  and  a  willingness  on  the  part 
of  the  rank  and  file  to  support  their  leaders  as  long  as  their 
policies  get  results  in  terms  of  better  wages,  hours  and 
working  conditions.  Hence,  labor  union  organization  is 
democratic  in  the  sense  that  a  great  deal  of  dictatorial 
authority  rests  with  officers  and  leaders  in  the  determina- 
tion of  immediate  strategy,  and  that  this  authority  is  sub- 
ject to  the  ultimate  satisfaction  of  the  rank  and  file.  If  the 
dictatorial  and  aggressive  methods  of  one  leader  fail  to  get 
results,  a  new  leader  will  be  chosen  and  wiU  be  commis- 
sioned to  use  his  large  powers  to  win  the  desired  results. 
Successful  unionism  therefore  rests  upon  successful  leader- 
ship and  successful  leadership  rests  upon  results  in  terms 
of  gains  to  the  workers,  attained  by  the  aggressive  genius 
of  union  officials.^ 

In  addition  to  the  structural  types  of  unionism,  there  are 
certain  types  which  are  classified  on  the  basis  of  the  func- 
tions which  they  perform,  and  of  the  purposes  and  methods 
of  their  activity.^  The  dominant  type,  classified  on  this 
basis,  is  husiness  iinimiism,  so  named  because  the  unionists 
look  upon  their  activities  from  a  business  point  of  view. 
They  devote  their  energies  to  practical  material  gains,  ordi- 
narily through  the  use  of  collective  bargaining.  Their  ob- 
jective is  ''more,  more,  more,  now."  To  raise  wages, 
shorten  hours,  and  improve  working  conditions  are  tan- 
gible, direct,  positive  objectives,  and  the  union  organiza- 
tions of  this  type  conceive  the  function  of  unionism  to  be 
to  attain  these  objectives  in  a  practical,  business-like  way. 

1  R.  F.  Hoxie,  "Trade  Unionism  in  the  United  States."  Chapter 
VII. 

^Ihid.,  Chapters  II-III. 


508  Economic  Democracy 

A  second  type  is  friendly  or  uplift  unionism, — a  type 
which  inclines  to  be  idealistic,  philosophical  and  co-opera- 
tive. It,  too,  uses  collective  bargaining,  but  mainly  for  such 
benevolent  purposes  as  mutual  insurance,  profit  sharing, 
friendly  benefits,  welfare  work  and  social  and  humani- 
tarian improvement.  Most  employers  who  profess  to  be- 
lieve in  the  right  of  laborers  to  organize  into  unions  have 
in  mind  a  unionism  of  this  friendly  or  uplift  type.  People 
who  believe  in  labor  unions  ' '  as  such ' '  contemplate  welfare 
unions  whose  efforts  are  directed  toward  a  co-operative 
humanitarianism  rather  than  toward  a  militant  demand 
for  practical,  business-like  gains  for  labor. 

Radical  unionism  is  a  third  type,  and  as  the  name  sug- 
gests, applies  to  unions  professing  socialistic  or  revolu- 
tionary purposes.  The  most  aggressive  unions  of  this  type 
have  been  those  associated  with  the  Industrial  Workers  of 
the  World.  The  I.  W.  W.  was  conspicuous  before  the  war, 
but  many  of  the  leaders  of  the  movement  were  vigorously 
suppressed  or  were  deported  during  the  war  period,  and 
the  formal  organization  of  the  I.  W.  W.  was  greatly  weak- 
ened. Their  ideas,  however,  were  carried  over  in  not  a  few 
eases  to  unions  of  the  business  type,  or  of  the  predatory 
type,  by  agitators  or  leaders  who  sought  to  spread  their 
philosophy  of  unionism  by  "boring  from  within."  It 
seems  certain  that  the  extent  of  this  kind  of  penetration  of 
old  unions  with  I.  W.  W.  ideas  is  considerably  exaggerated 
in  the  popular  mind. 

A  form  of  radical  unionism  which  has  more  far-reaching 
significance  is  contained  in  such  union  organizations  as  the 
United  Mine  Workers  of  America,  the  Railroad  Brother- 
hoods, and  the  Amalgamated  Garment  Workers  of  Amer- 
ica. The  United  Mine  Workers  are  pressing  for  the 
nationalization  of  the  mines  along  a  quasi-socialistic  direc- 
tion and  the  Railroad  Brotherhoods,  by  urging  the  adop- 
tion of  the  Plumb  Plan  for  railroad  operation,  committed 
their  union  organizations  to  a  policy  which  was  essentially 
in  the  nature  of  guild  socialism.  The  purposes  of  the 
Amalgamated  Garment  Workers  may  be  set  forth  in  the 
following  quotation:    "An  analysis  of  the  strategy  of  the 


^Economic  Democracy  509 

new  "unionism  ■will  discover  in  it  two  fundamental  objec- 
tives to  whifli  all  other  policies  are  subordinated.  The 
first  is  to  organize  all  the  workers  in  the  industry;  the 
second  is  to  develop  them,  through  their  daily  struggles, 
into  a  class-conscious  labor  army,  able  and  ready  to  assume 
control  of  industry.  .  .  .  Their  whole  tendency  is  in  the 
direction  of  training  the  workers  for  assuming  control  of 
production,  and  of  accepting  the  social  and  economic  re- 
sponsibility Avhich  such  control  involves,"^  To  this  end, 
the  garment  unions  look  forward  to  the  abolition  of  the 
capitalistic  system.  Radical  unionism  has  increased  in 
strength  in  recent  years,  and  particularly  so  in  such  basic 
industries  as  coal,  transportation  and  clothing. 

A  fourth  type  has  been  designated  predcrtory  unionism. 
The  most  recent  exposure  of  predatory  unionism  has  been 
in  the  building  trades  of  large  cities.  In  New  York  City, 
a  notorious  labor  leader  by  the  name  of  Brindell  exercised 
dictatorial  and  unscrupulous  powers  for  the  sake  of  exact- 
ing fees,  bribes  and  blackmail  from  both  laborers  and  em- 
ployers. Such  unions  hold  up  all  parties  to  industry  by 
fair  means  or  foul  whenever  they  see  an  opportunity  to 
reap  a  selfish  gain.  In  its  extreme  forms,  predatory 
unionism  adopts  guerilla  tactics,  and  by  ruthless,  secret, 
violent  strategy  strives  to  exact  the  last  pound  of  flesh 
which  the  industrial  body  wdll  bear. 

The  great  bulk  of  labor  unionism  seeks  its  ends  by  means 
of  collective  bargaining.  The  nature  of  collective  bargain- 
ing differs  greatly  between  the  ordinary  works  council  and 
the  bulk  of  labor  unions  in  that  the  former  depends  for 
success  upon  the  voluntary  good  will  of  the  employer  and 
the  spirit  of  co-operation  between  labor  and  capital, 
whereas  the  latter  depends  upon  the  power  of  the  labor 
union  to  win  recognition  from  the  employer  and  upon  the 
relative  bargaining  might  of  labor  and  capital.  Most  of 
the  success  of  works  councils  comes  from  the  fact  that 
employers  co-operate  with  the  councils  wholeheartedly;  and 
most  of  the  abuses  and  excesses  of  labor  unions  come  from 
the  fact  that  employers  dislike  to  co-operate  with  labor 

1  Budish  and  Soule,  "The  New  Unionism,"  pp.  12,  194-195,  204. 


510  Economic  Democracy 

unions,  and  usually  consent  to  deal  with  them  only  when 
forced  to  do  so.  Works  councils  perform  their  responsi- 
bilities in  an  atmosphere  of  friendly  co-operation;  labor 
unions  perform  their  responsibilities  in  an  atmosphere  of 
hostility,  suspicion,  and  threats. 

The  consequence  is  that  labor  unions  are  characterized 
by  widespread  policies  and  deeds  which  are  highly  objec- 
tionable from  the  standpoint  of  the  best  interests  not  merely 
of  employers  and  the  public,  but  of  laborers  themselves. 
The  objectionable  tactics  of  organized  labor  arise  largely 
from  the  fact  that  labor  unions  have  to  fight  every  inch  of 
the  way  for  industrial  control  and  have  to  fight  then  for 
self-preservation  to  perpetuate  what  has  been  won.  Labor 
resorts  to  the  closed  shop  in  response  to  basic  human  in- 
stincts demanding  self-protection,  because  the  open  shop 
has  so  often  meant  in  actual  practice  a  free  opportunity 
for  employers  to  discriminate  against  union  members  and 
to  cripple  union  organization.  Union  rules  and  regulations 
which  restrict  production  seem  aimed  oftdn  to  secure  the 
maximum  of  pay  for  the  minimum  of  work,  and  in  this 
respect  they  reciprocate  the  endeavor  of  any  number  of 
employers  to  secure  the  maximum  of  work  from  labor  for 
the  minimum  of  pay.  If  one  were  to  draw  up  a  list  of  the 
faults,  vices  and  abuses  of  the  bulk  of  labor  unions  and 
were  to  trace  the  causes  of  each  item  on  the  list,  he  would 
find  them  largely  in  the  unhealthy  spirit  of  distrust  and 
antagonism  w^hieh  is  widespread  in  American  industry. 
The  penetrating  observations  of  Felix  Frankfurter,  from 
experience  on  President  Wilson's  Mediation  Commission 
and  as  chairman  of  the  National  War  Labor  Policies  Board, 
are  of  sound  practical  value :  ' '  The  unions  must  still  fight 
for  their  life  instead  of  being  a  recognized  social  instru- 
ment tested  by  their  contributions  to  the  community  as  a 
whole.  Not  until  they  are  generously  and  frankly  recog- 
nized as  having  a  rightful  place  in  our  national  life  will 
the  leaders  of  labor  have  time  and  energy  to  give  to  the 
solution  of  the  difficult  social  and  industrial  problems  with 
which  organized  labor  should  concern  itself.  ...  If  the 
fighting  spirit  imposed  by  capital  upon  labor  were  with- 


Econornic  Democracy  511 

drawn,  then  we  could  proceed  to  the  question  which  this 
conference  raises,  namely:  How  shall  we  release  the  ener- 
gies of  the  masses  of  the  people  who  are  workers  so  that 
our  civilization  shall  not  only  remove  the  sores  and  injus- 
tices which  infest  it  but  shall  be  something  fit  and  ade- 
quate for  democracy?" 

The  deepest  difficulties  in  insuring  that  labor  unions  are 
made  over  into  safe  and  trustworthy  instruments  of  indus- 
trial democracy  are  psychological  difficulties.  The  power- 
ful instincts  in  employers  of  self-assertion,  domination  and 
freedom  of  action  are  thwarted  by  the  demands  of  labor 
unions  for  group  self-assertion  in  deciding  industrial 
issues.  Habits,  traditions  and  customs  have  constituted  a 
steady  psychological  influence  on  the  business  man  to  make 
him  feel  that  there  is  one  and  only  one  way  to  manage 
business  efficiently  and  that  is  to  run  it  as  he  pleases,  free 
from  outside  restraint ;  labor  unions  challenge  this  accumu- 
lation of  precepts  and  habits  in  business,  and  it  is  inev- 
itable and  natural  for  the  business  man  to  resist  the 
upheaval  of  those  business  principles  which  he  has  come  to 
believe  are  axiomatic.  But  the  greatest  psychological  force 
in  shaping  the  attitude  of  the  business  man  toward  labor 
unions  is  fear.  The  business  man  has  a  right  to  fear  that 
if  he  concedes  an  inch  to  labor  unions  they  will  take  a  mile. 
He  has  no  assurance  that  if  he  attempts  to  co-operate  with 
labor  in  a  constructive  way  he  may  not  find  himself  soon 
at  the  mercy  of  predatory  unionism.  It  is  this  universal 
fear  that  labor  unions  will  cling  to  their  abuses  and  faults 
if  employers  do  freely  and  frankly  admit  them  to  a  share 
of  industrial  control  which  primarily  accounts  for  the 
fighting  attitude  of  hostility  and  resistance  to  the  tactics 
of  labor  unions.  These  psychological  obstacles  to  the  ad- 
vance of  unionism  are  at  the  heart  of  the  problem.  As  a 
matter  of  fact,  it  would  doubtless  be  disastrous  for  em- 
ployers generally  to  turn  over  full  powers  to  labor  unions 
suddenly.  What  would  happen,  however,  if  employers 
approached  unions  in  the  same  manner  as  the  more  pro- 
gressive of  them  have  approa<'hed  works  councils  is  not  so 
diahearteuing  a  eonjecture.     The  method  of  afJproa'c'k  in 


512  Economic  Democracy 

that  case  is  a  deliberate  and  painstaking  effort  by  the  em- 
ployer to  establish  frank  co-operation,  to  give  honest  infor- 
mation about  the  financial  affairs  of  the  company,  to 
educate  foremen,  bosses  and  superintendents  to  perform 
intelligently  their  parts  under  the  works  council  system, 
and  to  create  mutual  confidence  by  every  word  and  every 
move.  The  contrast  between  the  method  of  approach  to 
works  councils  and  to  labor  unions  is  extreme,  and  the 
success  of  the  constructive  and  co-operative  method  in 
keeping  works  councils  reasonably  free  from  the  abuses 
frequent  in  labor  unions  is  a  ground  for  the  hope  that  the 
same  constructive  and  co-operative  method  applied  to 
labor  unions  would  go  far  toward  removing  those  abuses 
as  they  now  exist  in  unionism. 

AVilliam  Howard  Taft,  joint  chairman  during  the  war  of 
the  National  War  Labor  Board  and  since  appointed  Chief 
Justice  of  the  United  States  Supreme  Court,  has  summar- 
ized the  situation  in  words  which  express  both  sound  public 
policy  and  sound  economic  principles:  "Organization  of 
labor  has  become  a  recognized  institution  in  all  the  civilized 
countries  of  the  world.  It  has  come  to  stay;  it  is  full  of 
usefulness  and  is  necessary  to  the  laborer.  It  shows  serious 
defects  at  times  and  in  some  unions.  .  .  .  These  are  evils 
that  as  the  unions  grow  in  wise  and  intelligent  leadership 
we  may  well  hope  are  being  well  minimized.  .  .  .  "Whether 
we  will  or  not,  the  group  system  is  here  to  stay,  and  every 
man  interested  in  public  affairs  must  recognize  that  it  has 
to  be  dealt  with  as  a  condition,  to  be  favored  in  such  a  way 
as  to  minimize  its  abuses  and  to  increase  its  utility."^ 

The  foregoing  account  of  the  institutional  and  psycho- 
logical relations  between  employers  and  employees  would  be 
incomplete  at  a  most  important  point  if  the  responsibility 
of  labor  unions,  especially  of  their  leaders,  in  the  circum- 
stances were  not  pointed  out.  The  militant  attitude  of 
labor  union  leaders  may  be  quite  natural  under  the  pre- 
vailing conditions,  but  there  will  certainly  be  no  escape 
from  industrial  antagonism  until  unionism  accepts  a  more 
constructive    attitude    toward    problems    of    production. 

ID.  Blobmfield,  "Problems  of  Labor,"  pp.  212-214. 


Economic  Democracy  513 

Unionism  inherits  a  tradition  of  aggressiveness  and  mili- 
tancy and  the  tradition  is  extremely  tenacious;  but  unless 
the  tradition  can  be  altered  sufficiently  to  make  a  place  in 
trade  union  principles  for  a  recognition  of  the  basic  eco- 
nomic fact  that  labor  organizations  can  safely  be  trusted 
with  power  only  when  they  evince  a  willingness  and  a 
capacity  to  promote,  encourage  and  organize  greater  pro- 
ductive efficiency,  then  labor  can  scarcely  hope  for  business 
recognition  or  public  support.  The  reconstruction  of 
labor  union  organization  and  strategy  on  principles  condu- 
cive to  labor  efficiency  and  to  maximum  production  is  a 
sine  qua  non  of  evolving  sound  industrial  democracy  from 
present  trade  union  structure. 

In  large  measure,  such  a  reconstruction  of  unionism  can 
come  only  as  an  act  of  will  on  the  part  of  unionists,  espe- 
cially of  their  leaders.  They  must  make  up  their  minds 
and  exercise  their  powers  of  volition  before  an  adequate 
reconstruction  can  occur.  But  the  psychological  process 
can  scarcely  be  hoped  for  if  it  is  to  come  merely  as  an  act 
of  will.  The  irrational  and  blindly  instinctive  forces  which 
tend  to  stifle  such  a  deliberate  change  of  mental  outlook 
are  enormous,  and,  it  must  be  admitted,  they  are  likely  to 
prevail  under  the  present  state  of  affairs.  Only  rarely  can 
men,  especially  masses  of  men,  rise  above  their  institutional 
surroundings  and  deliberately  resolve  upon  a  new  spirit 
and  a  new  attitude  toward  their  responsibilities.  The  level 
of  the  behavior  of  the  crowd  cannot  rise  much  above  the 
level  of  its  institutional  environment.  Industrial  institu- 
tions which  invoke  pernicious  human  tendencies  and  which 
stimulate  dangerous  expressions  of  the  primary  human  in- 
stincts cannot  be  counteracted  by  the  mere  logical  or  ra- 
tional powers  of  the  crowd  mind.  On  the  other  hand, 
institutional  arrangements  which  help  men  to  a  co-opera- 
tive attitude,  to  self-control,  to  constructive  effort  have  the 
most  salutary  influences  upon  the  beliefs  which  they  put 
into  action.  Hence  to  invent  by  gradual  experiment  and 
by  intelligent  trial  and  error  the  type  of  industrial  insti- 
tutions best  fitted  to  help  the  better  and  hinder  the  more 
pernicious    expressions    of    the    great    human    instinctive 


514  Economic  Democracy 

energies,  is  a  paramount  task  for  all  those  who  desire  to 
share  in  hastening  the  progress  of  industrial  democracy/ 

A  crucial  point  in  industrial  institutions  is  the  issue  of 
the  proper  basis  of  collective  bargaining.  The  great  slogan 
of  labor  is  that  "labor  is  entitled  to  collective  bargaining 
through  representatives  of  its  own  choice."  The  objection 
raised  by  employers  is  that  such  a  principle  enables  labor 
to  be  represented  by  leaders  of  the  national  union  who  are 
not  employees  of  the  particular  plant  where  they  are  rep- 
resenting labor  in  collective  bargaining.  Employers  have 
favored  the  works  council  because  in  every  ease  the  repre- 
sentatives of  the  workers  at  any  single  plant  are  themselves 
w^orkers  at  that  plant.  Being  employed  at  the  plant,  the 
works  council  representatives  presumably  know  from  direct 
experience  something  about  the  problems  involved  in  pro- 
duction and  in  labor  administration,  and  have  a  strong 
spirit  of  responsibility  to  their  immediate  constituents  with 
whom  they  mingle  constantly  in  the  day's  work.  If  an 
employer  accepts  the  labor  union  principle  of  collective 
bargaining,  he  is  likely  to  have  to  deal,  not  with  a  workman 
in  his  ovm.  plant,  but  with  a  leader  from  a  national  union's 
headquarters.  From  the  employers'  standpoint  this  union 
representative  is  an  outsider  and  a  meddler,  and  knows 
little  or  nothing  of  the  particular  problems  of  an  individual 
plant.  To  have  an  outsider  interfering  in  the  management 
of  his  business  impresses  the  employer  as  an  absurd  dicta- 
tion by  an  outsider  as  to  how  he  shall  run  his  business. 
Hence,  the  progressive  employer  accepts  the  general  prin- 
ciple of  collective  bargaining  through  representatives  of 
labor's  own  choice,  with  the  proviso  that  those  representa- 
tives shall  be  persons  actually  working  in  the  plant  which 
they  presume  to  represent. 

From  the  labor  unions'  viewpoint,  this  policy  of  em- 
ployers is  looked  upon  as  a  subterfuge.  No  one  dictates  to 
the  employer  that  his  agent  in  collective  bargaining  shall 
be  actually  employed  in  the  plant.  If  the  corporation  is  a 
large  one,  comprising  a  dozen  or  a  score  or  more  of  plants, 
the  company  centralizes  its  part  in  collective  bargaining  in 
1  See  Jatnes  Bryce,  "Modern  Democracies,"  Vol,  I,  p.  10. 


Economic  Democracy  515 

the  hands  of  some  executive  at  the  main  office,  who  of 
course  cannot  be  employed  in  each  one  of  the  separate 
plants  of  the  company.  Labor  reasons  that  it  should  pos- 
sess a  similar  prerogative  of  centralizing  its  part  in  collec- 
tive bargaining.  Moreover,  labor  finds  that  it  is  no  light 
task  to  match  labor's  brains  against  the  best  brains  that 
management  can  produce.  Suppose,  argues  labor,  two  men 
in  ordinary  life  have  a  dispute  and  bring  their  case  into  a 
court.  Suppose  one  man  hires  a  brilliant  lawyer,  a  man 
of  great  talent  and  ability,  and  the  other  man  hires  only  a 
mediocre  lawyer,  a  man  of  slight  talent  and  weak  ability. 
The  chances  are  all  in  favor  of  a  decision  for  the  man  who 
is  ably  represented.  So  in  industrial  relations,  manage- 
ment is  represented  by  brilliant  men,  by  the  best  experts 
that  management  can  procure;  labor,  in  order  to  be  repre- 
sented on  equal  terms,  must  have  expert  bargainers,  men 
experienced  in  all  the  strategy  of  bargaining,  the  best 
brains  that  labor  can  procure.  The  detached  individual 
plant  is  likely  not  to  have  any  workman  on  the  job  who  is 
fully  equal  mentally  to  the  task ;  hence  there  is  need  of  a 
man  trained  and  practiced  in  the  art  of  bargaining,  a  man 
direct  from  national  union  headquarters. 

In  President  Wilson's  first  industrial  conference,  ap- 
pointed to  deal  with  the  problems  of  post-war  industrial 
reconstruction,  the  committee  was  composed  of  prominent 
authorities  representing  labor,  capital  and  the  public.  The 
attention  of  all  groups  was  riveted  to  this  problem  of 
whether  or  not  labor  is  entitled  to  representatives  of  its 
own  choice  in  collective  bargaining.  In  the  final  vote,  the 
public  group  and  the  labor  group  voted  in  favor  of  the 
unqualified  right  of  labor  to  representatives  of  its  own 
choice.^  A  minority  of  the  capital  group  voted  with  labor 
and  the  public,  but  inasmuch  as  the  system  of  voting  in 
force  at  the  conference  provided  that  the  adoption  of  any 

1  The  full  text  of  the  resolution  is  as  follows :  "The  right  of  wage 
earners  to  organize  without  discrimination,  to  bargain  collectively, 
to  be  represented  by  representatives  of  their  own  choosing  in  nego- 
tiations and  adjustments  with  employers  in  respect  to  wages,  hours 
of  labor,  and  relations  and  conditions  of  employment  is  recognized." 


516  Economic  Democracy 

measure  required  a  majority  vote  in  each  of  the  three 
groups,  the  resolution  was  lost.  Thereupon  the  conference 
broke  up. 

In  a  discussion  of  the  broader  principles  of  industrial 
democracy,  it  is  important  to  consider  the  question  of  the 
relation  in  practice  between  works  councils  and  labor 
unions.  Are  the  two  supplementary,  or  do  works  councils 
tend  to  eliminate  labor  unions  entirely?  The  consensus  of 
opinion  among  employers  using  works  councils  is  to  the 
effect  that  they  have  nothing  against  the  union  and  are  not 
aiming  to  destroy  it  or  eliminate  it.  They  are  willing  that 
labor  unions  should  exist,  and  will  allow  workers  who  are 
union  members  to  sit  on  the  works  councils  as  representa- 
tives of  the  workers  of  the  plant.  They  contend  that  there 
is  no  valid  reason  why  the  union  should  not  supplement 
the  works  council.  With  rare  exceptions,  they  decline  to 
enter  into  collective  bargaining  with  the  union,  or  to  give 
it  official  recognition,  claiming  that  one  collective  bargain- 
ing agency  is  enough  and  that  this  is  supplied  through  the 
works  council.  Hence,  the  real  meaning  of  the  assertion  by 
employers  that  they  believe  in  a  union  supplementing  the 
works  council  is  that  they  believe  in  that  particular  type  of 
union  which  is  classified  as  friendly  or  uplift  unionism. 
The  welfare,  humanitarian  and  social  features  of  such  a 
unionism  may,  in  the  judgment  of  employers,  supplement 
the  efforts  of  the  works  council.  Theoretically,  this  divi- 
sion of  supplementary  functions  appears  sound  and  plau- 
sible. It  should  be  carefully  noted,  however,  that  the  works 
councils  themselves  undertake  such  a  comprehensive  pro- 
gram that  when  they  get  through  there  is  little  left  for 
supplementing.  The  works  councils  undertake  welfare 
work,  humanitarian  measures,  social  features,  and  virtually 
all  forms  of  friendly  and  uplift  activity.  Moreover,  the 
works  councils  do  this  usually  on  company  time  and  at 
company  expense.  In  the  face  of  this  condition,  a  union 
which  could  not  gain  recognition,  which  could  not  bargain 
for  better  wages,  hours  or  working  conditions,  which  could 
only  undertake  friendly  and  uplift  work,  would  be  an 
anomaly.    It  could  not  collect  dues  for  performing  humani- 


Economic  Democracy  517 

tarian  duties  which  the  works  councils  perform  largely  at 
company  expense  and  it  would  gradually  dwindle  in  power 
and  influence.  In  theory,  the  two  may  be  termed  supple- 
mentary, but  in  actual  life  the  works  council  when  effi- 
ciently handled  covers  the  ground  so  thoroughly  that  there 
is  nothing  essential  left  for  the  union  to  do.  Hence,  as  a 
matter  of  plain  industrial  fact,  the  efficiently  handled 
works  council  tends  to  be  exclusive  of  the  labor  union.  The 
course  of  contemporary  events  indicates  that  the  works 
councils  are  in  fairly  exclusive  control  of  collective  bar- 
gaining in  most  companies  where  the  councils  are  employed 
and  the  trade  unions  in  fairly  exclusive  control  of  collec- 
tive bargaining  in  most  other  cases  where  any  form  of 
collective  dealing  is  in  vogue,  with  occasional  exceptional 
cases  where  the  two  stand  in  some  supplementary  rela- 
tionship. 

All  lines  of  thought  on  these  issues  of  industrial  democ- 
racy lead  back  to  the  great  fact  that  the  war  and  post-war 
period  set  loose  a  new  flood  of  human  energy  in  the  direc- 
tion of  more  control  by  labor  over  its  own  life  in  industry. 
Before  the  war  the  emphasis  in  industrial  thinking  was 
upon  Icvss  poverty,  better  wages,  shorter  hours  and  better 
working  conditions.  To-day  the  emphasis  is  upon  labor's 
right  and  ability  to  participate  in  the  government  of  in- 
dustry. The  former  demands  have  not  been  abandoned, 
but  they  have  been  co-ordinated  with  a  greater  demand 
that  with  better  wages,  hours  and  working  conditions  must 
come  a  new  degree  of  labor  control  over  industrial  matters 
which  deeply  affect  the  life  and  welfare  of  labor.  Some 
application  of  the  principle  of  self-determination  to  the 
laborer's  position  in  industry  is  looked  upon  as  the  pre- 
requisite of  any  serious  industrial  democracy.  Whether 
the  instrument  be  a  labor  union  or  a  works  council,  the 
worker  feels  impelled  toward  a  new  status  as  one  of  the 
controlling  influences  in  the  management  of  industry.  The 
concise  interpretation  of  Sidney  "Webb,  expressed  in  1920, 
sums  up  the  situation  in  both  America  and  Great  Britain : 
"The  new  ideas  which  are  to-day  taking  root  in  the  trade 
union  world  center  round  the  aspiration  of  the  organiza- 


518  Economic  Democracy 

tions  of  manual  workers  to  take  part — some  would  urge  the 
predominant  part,  a  few  might  say  the  sole  part — in  the 
control  and  direction  of  the  industries  in  which  they  gain 
their  livelihood."^ 

This  being  the  plain  fact  of  the  case,  it  is  imperative  to 
realize  that  beneath  the  movement  for  control  lies  a  truly 
enormous  psychological  force.  Some  of  the  deepest  in- 
stinctive energies  of  millions  of  human  beings  are  seeking 
for  an  opportunity  of  expression.  At  this  particular  stage 
of  industrial  progress  an  outburst  of  powerful  forces  of 
human  nature  has  appeared  pointing  toward  some  form  of 
democratic  control  of  economic  life.  It  would  be  psycho- 
logically unsound  and  economically  disastrous  to  give  such 
untrained  human  energies  free  rei^n.  But  it  is  both  sound 
and  necessary  to  provide  helpful  channels  of  expression  for 
such  human  forces,  to  accustom  instinctive  energies  to  self- 
restraint  and  self-control,  to  subject  them  to  adequate 
working  discipline,  to  repress  vicious  and  pernicious  forms 
of  expression,  to  educate  and  enlighten  and  inform  men  to 
understand  themselves  and  others  in  order  that  the  nervous 
breakdowns  and  the  psychic  revolts  of  a  period  of  indus- 
trial transition  may  be  healthfully  averted,  and  to  raise  the 
level  of  intelligence  among  the  rank  and  file  of  laborers  so 
that  they  may  be  enabled  to  make  the  right  adaptations 
between  human  nature  and  economic  institutions.  The 
reshaping  simultaneously  of  men  and  institutions  is  the 
secure  pathway  toward  industrial  democracy. 

REFERENCES 

Wood,  Chas.  "W.:  The  Great  Change 
Croly:  The  Promise  of  American  Life 
Jenks  and  Clark:  The  Trust  Problem 

The  Trust  Problem,  National  Civic  Federation  Symposium,  1912 
Stevens:    Unfair    Competition;    Clayton    Act,    American    Eco- 
nomic Review,  Vol.  5,  p.  499 
Van  Hise:  Concentration  and  Control 

Hamilton,  W.  H.  :  Current  Economic  Problems,  parts  7  and  8 
Laski:  Authority  in  the  Modern  State 

i"History  of  Trade  Unionism,"  p.  649 


Economic  Democracy  519 

Marshall,  L.  C.  :  Readings  in  Industrial  Society,  Chapters  10, 

12,  and   15 
Seager:  Principles  of  Economics,  Chapter  XXV. 
Taft:  The  Anti-Trust  Act  and  the  Supreme  Court 
Haney,  L.  H.:  Business  Organization  and  Combination 
Clay,  H.  :  Economics  for  the  General  Reader,  Chapters  21  and  22 
Commons  and  Andrews:  Principles  of  Labor  Legislation 
FoLLETT,  M.  P.:  The  New  State 
Hadley:  Undercurrents  in  American  Politics 
Friedman,  E.:  American  Problems  of  Reconstruction,  Chapters 

X  and  XXIV 
Hammond  and  Jenks:  Great  American  Issues 
Jenks,  J.  W. :  Business  and  the  Government 
Stevens:  Industrial  Combinations  and  Trusts 
Ryan  :  Social  Reconstruction 
De  Witt:  The  Progi-essive  Movement 
Giddings,  F.  H.:  The  Responsible  State 
WiLLOUGHBY,  W. :   Government  of  Modern  States 
West:  Federal  Power 

Brown,  W.  J. :  Prevention  and  Control  of  Monopolies 
Marshall,  A.:  Industry  and  Trade,  Bk.  2  and  3. 
WiLLOUGHBY:  Government  Organization  in  War  Time  and  After 
Ripley:  Railroads;  Rates  and  Regulation 
Clark,  J.  B.  and  J.  M.:  Control  of  Trusts 
Durand,  E.  D.:  Trust  Legislation  of  1914,  Quarterly  Journal  of 

Economics,  Vol.  29,  pp.  72-97 
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Political  Science  Quarterly,  Vol.  33,  pp.  396-461;  Changing 

Law  of  Foreign  Corporations,  Political  Science  Quarterly, 

Vol.  33,  p.  549 
Seager,   H.   R.:    The  New  Anti-Trust  Acts,   Political   Science 

Quarterly,  Vol.  30,  pp.  448-463 
Young,  A.  A.:  Sherman  Act,  and  New  Anti-Trust  Legislation, 

Journal  of  Political   Economy,  Vol.  23,  pp.  201,  305,   417 
PiGOU,  A.  C:  Government  Control  in  War  and  Peace,  Economic 

Journal,  Vol.  28,  pp.  363  ff. 
Spargo:    Applied   Socialism,  Syndicalism,  Industrial   Unionism 

and  Socialism 
Brooks:  Labor's  Challenge  to  the  Social  Order 
Walling  and  others :  The  Socialism  of  Today 
Walling,  W.  E.:  Progressivism  and  After 
Russell,  Bertrand:  Bolshevism;  Proposed  Roads  to  Freedom; 

Political  Ideals 
Brissenden  :  The  I.  W.  W. 
Brooks,  J.  G. :  American  Syndicalism 


520  Econornic  Democracy 

Reckitt  and  BechHofer:  The  Meaning  of  National  Guilds 

Mallock,  W.  H.  :  Critical  Examination  of  Socialism 

Myers:  Socialism  and  American  Ideals 

Adams,  B.  :  Theory  of  Social  Revolutions 

Report    of    National    Industrial    Conference    Board    on    Works 

Councils,  1919 
Bryce:  Modern  Democracies 

Hamilton,  W.  H.  :  Current  Economic  Problems,  parts  11  and  14 
BUDISH  and  Soule:  The  New  Unionism 

Edie,  L.  D.  :  Current  Social  and  Industrial  Forces,  parts  6  and  7 
Goodrich  :  The  Frontier  of  Control 
Commons,  J.  R. :  Trade  Unionism  and  Labor  Problems 
Webb:   History  of  Trade  Unionism 

Cleveland  and  Schafer:   Democracy  in  Reconstruction 
Croly,  H.:  Progressive  Democracy 
Zimmern,  a.  E.:  Nationality  and  Government 
Leitch,  J.:     Man  to  Man 

Wolfe,  A.  B.:  Works  Committees  and  Joint  Industrial  Councils 
Dickinson,  G.  Lowes:  Justice  and  Liberty 
Brandeis:   Business  a  Profession 
Benedict:  The  Larger  Socialism 
Van  Hise:   Concentration  and  Control 
Federal  Trade  Commission  Report  on  Meat-Packing  Industry, 

1919 
Gilbreth:  The  Psychology  of  Management 
Proceedings:  Society    of    Industrial    Engineers,    March   24-26, 

1920 
Haney,  L.  H.:  Business  Organization  and  Combination 
Thompson,  C.  B.:   Scientific  Management 
Dewing:  Corporate  Promotions  and  Reorganizations 
Gowin:  The  Selection  and  Training  of  the  Business  Executive 
Ely:   Monopolies  and  Trusts 
Ripley,  W.  Z.  :  Trusts,  Pools  and  Corporations 
Jordan,  B.  F.:  Business  Forecasting 
Wilson,  T.  W.:  The  New  Freedom 
Frederick,  J.  G. :  Business  Research  and  Statistics 
Copeland,  M.  T.:  Business  Statistics 
Dixon,  F.  H.  :   Interlocking  Directorates  in  Railroads  Journal 

of  Political  Economy,  Vol.  22 ;  pp.  937-955 
Clark,  J.  B.:  Problem  of  Monopoly 
Wolman:  Theory  of  Production;  American  Economic  Review, 

March,  1920;  pp.  37-56 
Lewisohn,  S.  a,:  Modern  Management,  Atlantic  Monthly,  Vol. 

126;  pp.415  ff. 
HoBSON,  J.  A.:  Evolution  of  Modern  Capitalism 


INDEX 


Ability,  unrealized,  223-225 

Abnormal  psychology,  63—66 

Acceptances,  bank,  426 

Accidents,   industrial,   141—143 

Accounting,  253—255 

Adams,  T.  S.,  448 

Adaptation,       economic,       453—520; 

human,  to  economic  environment, 

52-69 
Advertising,  299-305,  356 
Americanization,  161—162 
Anderson,  B.  M.,  Jr.,  348,  382-384, 

391-392,  436 
Automatic  machinery,  78—80;  effect 

on  labor,  99-104 

Banks,  366  ff.;  agricultural,  398- 
400;  commercial,  371-384;  cor- 
porations and,  271-274;  federal 
reserve,  404-427 ;  foreign  invest- 
ment, 396-398;  functions,  373- 
380;  international,  416-427;  in- 
vestment, 384-389;  reserves,  377; 
savings,  393-394;  trust  com- 
panies, 394-396 

Bargaining.  See  Collective  bar- 
gaining 

Bassett,  W.  R.,  10 

Bimetallism,  368 

Bloomfield,  D.,  512 

Bonds,  210-211;  foreign,  396-398; 
investment  banking,  384—389 

Brandeis,  Louis,  90,  236,  387 

Bryce,  James,  480,  501,  514 

Business  combinations.  See  Com- 
bination 

Cannon,  W.  B.,  59-60,  66 

Capital,    175—234;    production    and, 

73 
Carver,  T.  N.,  55-56,  101 
Chance,  inequalities  due  to,  232—234 
Checks,  375-380 
Chemistry,     economic     applications, 

83-87 


Class  feeling,  workers',  101-102 
Clayton  Act,  340-344,  440,  468-478 
Clearance,  bank,  401-404,  415-416 
Collective  bargaining,  129—135,  505— 

518 
Combination,       business,       242—244, 
258-276;    price   policies   of,   327- 
336 
Commons,  J.   R.,   56,   159-103,   205, 

231,  441 
Competition,  256-277,  327-330,  345; 

public  control  and,  453—486 
Concent  :ation,     business,     242—244, 

258-276,  327-336,  453-486 
Conservation,  19 
Consumption,    control    of,    296—363; 

description  of,    189-193 
Contract,  freedom  of,  206-208 
Control.     See  Public  control 
Cooley,  C.  H.,  97,  102,  109,  193,  349, 

357,  361 
Co-operation,      economic,      274-277 ; 

consumers',   362 
Copeland,  M.  T.,  297 
Corporation,  characteristics  of,  208— 
225;  extent  of,  241-242;  manage- 
ment  of,    244—253;    securities   of, 
384-393 
Cost    of    production,    price    theory, 

281-285 
Credit,    366    ff.;     commercial,    371- 
384 ;  dangers  of,  427-450 ;  foreign, 
416-427;    forms  of,   372-373;    in- 
vestment, 384-389 ;  psychology  of. 
441-450;  rural,  398-400 
Curiosity,  psychology  of,  32—37 
Custom,  wages  and,  133—135 
Cycles,  business,  427-450;  control  of, 
431-437 

Demand,  creation  of,  296-363 
Demand    and    supply,    price    theory, 

285-315,    344-363;    wage    theory, 

118,   160 


521 


522 


Index 


Democracy,  economic,  129-135,  138- 

141,  268-270,  499-518 
Deposits,  bank,  374-380,  411-412 
Dewey,  John,  35,  90,  349,  456-458 
Dewing,  A.,  208,  213,  250,  263,  272, 

274,  386 
Discount,  384 

Discipline,  adaptation  by,  54—56 
Distribution,     wealth     and     income, 

177-187,  236-277 
Drury,  H.  B.,  80,  114 
Duncan,  C.  S.,  291,  297,  309,  314 

Economics,  defined,  1-2,  69,  199; 
mechanical  and  scientific  basis  of, 
72-98 

Edge  Act,  425-426 

Electricity,  significance  of,  74—76, 
88-90 

Elimination,  adaptation  by,  56—57 

Ely,  R.  T.,  184,  194,  197,^199,  203- 
207,  332 

Emery,  H.  C,  308,  346 

Engineering,  industrial,  93—98 

Environment,  economic,  52—69; 
worker    and,    141—149 

Eugenics,  167-170 

Exchange,  domestic,  401—404;  for- 
eign, 417-427 

Executive,   technique  of,   253—258 

Fairchild,  H.  P.,  160 

Farm  credits,  398-400 

Fatigue,  99-115 

Fear,  24-26,  108-109,  141-143,  444 

Federal  Reserve  System,  centraliza- 
tion under,  405—406;  clearance, 
415-416;  cycles,  430-432;  de- 
posit currency,  411—416;  foreign 
banking,  425—428 ;  note  issue, 
406—411;  organization  of,  404; 
reserves,  412 

Fetter,  F.  A.,   168 

Finance,  366-450 

Fisher,  Irving,  227,  374,  434 

Flight  and  fear.     8ee  Fear 

Foreign,  credit  balance,  417—418; 
exchange,  417—427;  investment, 
396-398 

Freud,  S.,  58,  61,  64 

Friday,  David,  73.  136-138.  180-187, 
221-222,  430,  436-437,  449 

Functions,  economic,  72-452 


Geology,  economic  applications,  87— 
88 

Gold,  standard,  368-371 

Gompers,  Samuel,  149 

Government  control,  453  ff. ;  war- 
time, 458-460 

Gregarious  instinct,  21—23 


Habit,  41-43,   133-135,  296-363 

Hadley,  A.  T.,  204,  351 

Haney,  L.  H.,  212,  259 

Health,  workers',   142-144 

Hobson,   J.   A.,    115,   180,    189,   271, 

332,  341 
Hollander,  J.,  123,  124 
HoUingworth,*  H.  L.,  300 
Hoover,  Herbert,  9 
Hours  of  work,   110—115 
Housing  instinct,  29 
Hoxie,  R.   F.,   102,  155-157,  507 
Human  nature,  organization  of,  39— 

51 
Hunting,  instinct  of,  29 

Imitation,  43—46 

Immigration,  157—164 

Incentives,  93-97,  127-129;  non- 
financial,   144—149 

Income,  analysis  of,  187—232;  an- 
nual, 178—179;  distribution  of, 
177-187 

Inequality,  pyschological,  48—51 ;  of 
income,  183-187,  222-232 

Inheritance,  225-230 

Instinctive  tendencies,  adaptation 
of,  52  ff.,  453-520;  definitions, 
1—7;  discipline,  54—56;  elimina- 
tion, 56—57 ;  property  and,  195— 
199;  rationalization,  60—63;  re- 
Volt,  63-68;   sublimation,  57-61 

Instincts,  economic  expression  of, 
8-38 

Institutions,  economic,  72  ff. ;  finan- 
cial, 384-403,  437-441;  of  prop- 
erty, 193-232 

Insurance,  232-234 

Intelligence,  32-37;  of  labor,  149- 
157;  tests.  48-51 

Interest,  183-185;  effect  on  saving, 
192,  447,  450 

Interlocking  directorates,  440 

Interpretation  of  facts  of  wealth, 
187-199 


Indeijc 


523 


Interstate  Commerce  Commission, 
461-467 

Inventors,  93-97 

Investment  banking,  384-389;  for- 
eign, 396-398 

James,  W.,  29,  34,  59 

Jenks,  J.  W.,   159,  232,  329-333 

Job,  the  laborer's,  104-110 

Kemmerer,  E.  W.,  377,  404 
Kelley,  R.  VV.,  147 
Kindness,  psychology  of,  17-18 
King,   W.   I.,  73,   135,   168,   180-187 
Kitson,  H.  D.,  144,  146 
Knoeppel,  C.  E.,  144-145 

Labor,  democracy  and,  487—498; 
environment,  141-149;  function, 
99-104;  government  control,  477- 
479;  mind  of,  149-157;  part  in 
production,  99  flf. ;  power  of,  138— 
141;  public  opinion,  482-486; 
skilled  vs.  unskilled,  158-159; 
unions,   505-518;   wages,   116-138 

Laisscz  faire,  276,  363 

Laski,  H.  J.,  458 

Lippmann,  W.,   12,  58,  362 

Loans,  bank,  373,  380;  forms  of, 
381-384 

McDougal,  W.,  2,  6,  21,  24,  42,  44, 

167,  171 
Macliinery,  72-98 
Management,  efficiency  of,  149—150; 

finance   and,   437—441 ;    power   of, 

205-215;    technique  and   responsi- 
bility of,  236-277 
Marginal  theory,  281—315 
Markets,  definition,  279;  mechanism 

of,       313—318;       principles       and 

strategy,  279-364 
Marshall,  Alfred,  96,  254,  267,  270, 

305,  308,  328,  347,  447,  494 
Mechanical  factor,  72  if. ;  automatic, 

77-80;  labor  and,  99-104 
Meeker,  Royal,  122,  192 
Mental  activity,  disposition  to,  32— 

38 
Migration,  psychology  of,  29—30 
Minimum,  principle  of,  216-222 
Mitchell,  VV.  C,  35S,  430,  434 
Money,  definition,  366;   forms,  367- 

372;   gold  and,  367-368;  spending 

of,  346-361 


Monopoly,  and  income  inequality, 
230-234;  and  prices,  327-363 

Monotony,  99-104 

Motives.  1-71;  consumers',  346-363; 
progress,  93-97,  127-129;  prop- 
erty and,  195-232 

National  viewpoint,  171 
Notes,  Federal  Reserve,  406—411 

Ogburn,  W.  F.,  122 

Opinion,  public,  power  of,  482—486 

Orth,  S.  P.,  204 

Ownership,  income  for,  181—185;  in- 
stitution of,  175  ff.,  208-216; 
labor  view  of,   151—152 

Parental  instinct,  16—18 

Parker,  C.  H.,  58,  65,  79 

Parmelee,  M.,  28,  35,  42,  44,  123 

Patten,  S.  N.,  31,   165-166 

Pigou,  A.  C,  189 

Play,  psychology,  30-31 

Population,  19-21 ;  economic  phases, 
164-171;  immigration  and,  157- 
164 

Possession,  psychology  of,  10—13, 
97,   195-198 

Pound,  Roscoe,  206 

Poverty,  116-130 

Power,  natural,  74—77;  of  labor, 
138-141 

Price,  fixing  of,  343-346;  policies 
of,  305-363 ;  stabilization  of,  433- 
437;  system  of,  76-77,  366;  theo- 
ries of,'  281-315 

Production,  72—171;  national  vol- 
ume, 187-189.  See  also  •Cost  of 
production 

Profit  sharing,  128 

Progress,  economic,  453-458 

Property,  a  group  of  rights,  199— 
208.   'See  Capital 

Psychology,  economic,  1—71;  and 
consumption,  346-363 ;  of  credit, 
441-451;  of  radicalism,  492-498; 
of  reform,  479-482;  of  selling, 
295-363;   of  unionism,  511-513 

Public,  control,  453-482;  opinion, 
482-486 

Publicity,  483-486 

Pugnacity,  psychology  of,  26-28 

Quantity  theory  of  prices,  434-436 


524. 


Index 


Radicalism,    487-492;    analysis    of, 

492-498;    forms    of,    489-492;    in 

unions,  508-509 
Railroads,   labor   control,    135,  464— 

465;  regulation  of,  461—467 
Rationalization,    60-63;     by    labor, 

149-157 
Reform,  479-482 
Regulation,     general,     468—479;     of 

railroads,   461—467 
Rent,  182-183,  215-222 
Revolt,  psychology  of,  63—69 
Rights  of 'property,   199-214 
Rivalry,  psychology  of,  26—28 
Rockefeller,'  J.  D.,  "jr.,  9,  12 
Roosevelt,  T.  R.,   16,  47,  171,  229 
Root,  Elihu,  251 
Ross,  E.  A..  158,  194,  228 
Rural  credit,  398-400 
Russell,  Bertrand,   167 

Safety,  from  accident,  141-143 
Sales'  policy,  287,  290,  296-363 
Savings,    amount    of,    73-74,     180- 

181;    banks,    393-394;    principles 

of.   346-363;    psychology   of,   189- 

193,  446-450 
Science,  applied,  72  flf. ;   of  economic 

organization,  90-94;    of  progress, 

455-457 
Seager,  H.  R.,  265 
Self-assertion,  psvchology  of,  13-15; 

of  labor.  138-141 
Sex  instinct,  20-21,  52-69 
Sherman  Anti-Trust  Law,  276,  340- 

344,  468-476 
Size,  business,  236-239 
Slichter,  S.  H.,  100,  107,  108 
Socialism,  487  ff. ;  analvsis  of,  492- 

498;   forms  of,  489-492 
Southard,  E.  E.,  68 
Speculation,      308-310;      stock     ex- 
change, 388-393 
Stabilization  of  business,  430—437 
Standard   of   living,    120-127,   340- 

363 
Standardization,  265—267 
Statistics,  aid  to  management,  253— 

255;  marketing,  305-308;  wealth, 

175-234 
Stock  exchange.  389-393 
Stocks,  208-216 
Storage,  marketing  and,  309—311 


Style  of  product,  298 
Sublimation,    psychology   of,   57—61, 

502-505 
Submissiveness,   psychology   of,    15— 

16 
Suggestion,  psychology  of,  43—46 
Supply    and    demand,   price   theory, 

285-315,    344-363;    wage    theory, 

118,    160 
Surplus,  principle  of,  215-222 
Sympathy,  psychology  of,  43—46 

Taft,  W.  H.,  512 

Taussig,  F.  W..  95,  228,  284,  345 

Taxation,  229-230,  350-360 

Taylor,  F.  W.,  91,  99 

Tead,  0.,  20,  147 

Technology,    economic,    72—98;    and 

labor,  9'9-104 
Tendencies.      Hee    Instinctive    tend- 

GTICIGS 

Thorndike,  E.  L.,  17,  28,  32,  39,  42, 

55,  361 
Thought,  psychology  of,  32-37,  48- 

51;    of  labor,    149-157 
Transportation,    technology   of,    80— 

83;    regulation,   461—467 
Trotter,  W.,  22,  33,  45,  65 
Trust  companies,  394-396 
Turnover,  labor,  104-1  lO,  160 
Types  of  management,  239-244 

Unemployment,  103-110,  160;  busi- 
ness cycles  and,  430—437 

Unions,  analysis  of.  505—518;  bar- 
gaining power,  129-133,  138-141 

Value.  definition,  279-281;  of 
money,  434-437;  theory  of,  282- 
296 

^'anderlip,  F.  A.,  427 

Van  Hise,  C.  H.,  331-332 

Wages,  116-138;  factors  in,  120- 
138;  immigration  and,  159—160; 
incentives.  93-97,  127-129;  in- 
crease, 135—138;  share  in  national 
income.  182-183,  223 ;  theories  of, 
116—120.  See  also  Demand  and 
supply 
Wallas,  Graham,  17,  32,  64,  495 
War   Finance   Corporation,   426-427 


Index 


525 


Wealth,  analysis  of,  187-232;  defi- 
nition, 175-177,  187-189;  meas- 
urement of,  177-187 

Webb,  S.,  2G9 

Welfare  work,   128-129,   141-149 

Wilson,  Woodrow,  126,  344,  443,  477, 
510    515 

Wolfe,  A.  B.,  447-448 

Work,  hours  of,  110-116.    See  Labor 


Worker,  mind  of,  149-157 
Workmanship,  psychology  of,  8—10, 

95-97,  103 
Works  councils,  502—505 

Yerkes,  R.  M.,  94 

Zimmern,  A.  E.,  199 


® 


UCLA-Young   Research    Library 

HB171.5   .E23 

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L  009  518  319  0 


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